DFS Crypto “Coin Listing” Proposal Represents A Dramatic Expansion of the NY BitLicense

The comments below are in response to the New York DFS’s new proposed Coin Listing Policy Framework (the “Proposal” or the “Framework”) extension to the DFS Part 200 (the “BitLicense”) regulation, released on 12/11/2019 (available here. The DFS has provided only until January 27, 2020 to get comments in to innovation@dfs.ny.gov, so please read the Proposal and this post, and send them your thoughts ASAP).  The proposal consists, in main, of two prongs:

  1. A provision for DFS “listed” coins which will automatically be permitted to be used by BitLicense grantees (“Licensees”).
  2. A provision for self-certification of coins by Licensees which aren’t permitted under prong 1.

Little detail has been provided at this point, so the below comments reflect on the apparent main concepts of the Proposal, as well as interpret its general contextual and explanatory language.

As a reminder, the scope of the BitLicense is coverage only of those engaged in a “virtual currency customer business,” and so, the Proposal would apparently not effect either (a) non-business or (b) non-customer uses of cryptocurrencies (however, it’s worth noting that both limiting concepts could use more clarity in the context of the BitLicense).

  1. Issues with The First Prong.

The first (and main) prong of the Proposal uses the foundational language “list of all coins that are permitted for the Virtual Currency Business Activities of the VC licensees, without the prior approval of DFS.”

However, neither the BitLicense regulation itself nor the language of the Proposal makes it clear whether it will be permitted to utilize coins which aren’t expressly approved by the DFS (or aren’t approved under Prong 2: self-certification).  The alternative interpretation would be that of a “safe habor”: i.e., under which a Licensee could make use of non-approved coins in business, but would potentially receive less regulatory deference for them (or face some statutory limits under the safe harbor; e.g., limits in manner of use, type of customer, or scale).

My belief is that, on the wording of the Proposal, the DFS does intend to entirely prohibit dealings by Licensees in coins not approved under Prong 1 or Prong 2, rather than to create a new safe harbor.

If true, this would be striking, because it would represent a whole new dimension of the BitLicense: a ban on individual (non-approved) coins.  This requirement (which seems material to the BitLicense as a whole) is not spelled out in Part 200, nor, even, in the language of the BitLicense application materials (i.e., the language of the forms – which may typically go beyond the letter of the law, albeit, in a less-binding and more guidance-like capacity).

It appears, then, that ad hoc interactions between Licensees and the DFS regarding permissiveness of activities with respect to specific coins (by understandably-cautious regulated crypto financial companies) has been taken “to the next level” in a regulatory sense with this proposal.

The confusion is compounded by the use of the term “listing” in almost every place in the Proposal –except the one sentence quoted above, which seems to contemplate any type of virtual currency business activity.  The BitLicense itself does not define “listing”.  Thus, it is not clear if the Proposal is intended to encompass public listing activities of Licensees (i.e., by exchanges, such as Coinbase), or any dealings in coins (e.g., private custodial holdings,  private trading, payment processing, participating in a “utility token” ecosystem, etc.).

I believe this apparent quantum leap in the scope of the BitLicense deserves more public attention and scrutiny than it has thus far received.

To illustrate the impact of the regulatory shift, imagine you are a well-meaning crypto project starting up outside the U.S. — let’s say, Estonia.  You “do everything right” in terms of your project team, governance, and financing — and may explicitly follow applicable cryptocurrency or other regulations in your home country of Estonia, as well as potentially on cryptocurrency exchanges in other countries (which may themselves be licensed and have an explicit regulatory status — e.g., as Gibraltar provides).  You may even have what is on it’s face a “security token” – or choose to treat your coin as such, for regulatory certainty.

However, none of that “good citizenship” will result in your coin being listable – or perhaps even commercially-usable (i.e., in a custodial arrangement) by New York BitLicense holders.  This will simply not be possible unless your coin or token is explicitly permitted under the Proposal – either under Prong 1 (DFS listing), or more likely, Prong 2: Licensee self-certification of the coin.

And despite  the availability of Prong 2,   getting certified under it is one-off process, company by company (discussed further in the next section).  There are not a lot of parallels to this situation.  It would be as if every non-public stock had to be re-certified by every broker-dealer or exchange that wished to deal in it – and mind you, many of these crypto tokens will be regulatory securities, just like stocks.  This new Proposal, then, would represent a redundant layer of regulation for such instruments.

As for mainly “unit of exchange” crypto coins, these are more like currencies in view of the forex sector (which counts as its participants banks, speculative trading houses, and forex brokers).  Yet, none of the regulated players in the forex space are required to get approval for every single currency they deal in.

Note that, in both the cases of stocks and foreign currencies, the traded instruments may very well “implode”, despite all assurances, and best hopes. They also might suffer from varying levels of money laundering risk (something explicitly cited as a review factor in the Proposal with respect to crypto coins). But one of the core functions of the market is to “price risk” with respect to all manner of bad outcomes, including that fraud, insolvency, or some other form of risk (i.e., cybersecurity) might lurk within an instrument.

Thus, it is far from clear that a more restrictive, crypto coin-specific regime is appropriate – and such might even hinder the market in its risk-pricing function (which is also a risk-surfacing and mitigating function).


  • Clarify the permissiveness of non-approved coins under the BitLicense (under either prong of the Proposal)
  • Create (or clarify) a safe harbor for one or both prongs (preferably covering both).
  • Clarify whether the coin use restriction is with respective to public trading listings, or any “virtual currency business” use of a coin.
  • Limit the coin use restriction to public trading listings, or at least, tailor the safe harbor in a manner respecting “public vs. private” use (one might follow securities exemptions/safe harbors in this respect – and for similar reasons).
  • Clarify which factors would trigger the DFS to even review a coin for the general list in the first place, and if under consideration, what the criteria would be (presumably, all the company self-certification criteria, plus some additional ones).
  • Exempt coins which are securities in entirety (with a foreign reciprocation regime).
  • Exempt coins which have any regulated status under any qualifying foreign recognized regulatory regime.
  • Require the DFS to consider coins for listing by any paying applicant, fully subject to administrative and judicial review (just as with the BitLicense itself).
  1. Second Prong Issues

The second set of issues I see is with Prong 2 in specific.  This is the self-certification provision.  The DFS has suggested numerous factors to be examined in a self-certification framework.  Though the factors mentioned are not definitive, at least the DFS plans to release a “model” framework, and certainly, having this means of  coin  approval at all somewhat counterbalances the “bottleneck” that would exist if requiring DFS approval for every single coin.  We can naturally expect that this will be the go-to provision for newer coins that haven’t yet garnered universal attention or acceptance, and therefore would not be under consideration for general listing under Prong 1.

However, the effectiveness of this prong seems limited by its “one-off” status.  I.e., a Licensee that self-certifies a coin hasn’t done anything to make that coin usable by any other Licensee.  So, each Licensee will have to “reinvent the wheel” in onboarding a new coin.

Or, alternatively, the onus will be on the progenitor of the coin to advocate for its self-certification by individual New York Licensees.  It’s not clear why our Estonian (or any other foreign token-issuing) venture should have to be this concerned with individual companies in New York — particularly if they have followed all local  regulations and those of major crypto-coin trading venues.  In a sense, it’s a sort of “non-fungibility” rule for crypto assets that (almost by definition) doesn’t really exist in the broader financial sector — or in a free market property system, for that matter (imagine, e.g., pawn brokers not only having to themselves be licensed, but being required to “certify” every single type of asset they took in).

From the perspective of our Estonian applicant, it’s probably not worth the effort to shepherd their coin through possibly dozens of prospective Licensees.  This will provide a competitive disadvantage to smaller or upstart projects, which will inevitably make New York less competitive.


  • Make the Prong 2 prohibition a safe harbor (again).
  • Allow self-regulatory organizations to approve coins (this will presumably require some approval process in turn for the SRO – however, crypto SROs are indeed now in existence, such as the Association for Digital Asset Markets,  or ADAM).

III.  General Issues and Comments

  • Non-licensees who can still deal in crypto without a BitLicense under the DFS regulation; e.g., banks.  Apparently, these entities will have a unique advantage under this regime, as it appears they will not have to get coin-specific certifications.

    RECOMMENDATION: Clarify this (and preferably, do not establish this kind of differential treatment).

  • Regulatory Phase-ins. The BitLicense generally has no initial coverage threshold or “phase-in,” i.e., for small businesses or startups.  I view this as one of the most damaging shortcomings of the BitLicense broadly (and know of numerous clients and prospects who have avoided or pulled out of New York entirely because of it).  This has clearly created a preference for larger companies to deal in crypto in New York, and dramatically limited the choices of New York consumers and business.  Now, with coin-specific qualification, the lack of BitLicense phase-ins will be even more damaging.

    RECOMMENDATION: Allow businesses – subject to reasonable phase-in parameters (i.e., such as number of customers or revenue) – to be excluded from the BitLicense entirely, or subject to a general safe harbor.  Coincidentally, one doesn’t need to look far to find reasonably-tailored regulation in this sense effectively covering crypto companies in New York: the New York SHIELD privacy and data security law, which goes into effect in 2020 (indeed, most privacy and data security laws in the U.S. and worldwide phase-in thusly, so they don’t apply from dollar (or customer) number 1, and which would badly squelch commerce and innovation.  And arguably, crypto should have even more generous phase-ins, as most crypto clients make an affirmative choice and “know what they are getting themselves into” — unlike consumers generally using digital services).


I am a big fan of the increased securing and professionalization of the crypto sector, of which government regulation is a major (though not the only) part. However, the Proposal, and the BitLicense generally, could use significant fine-tuning to make it more friendly to innovation, including small businesses and startups.  Until this is done, I believe New York is missing out on playing a larger and more constructive role in this important new sector, and this new coin-permitting Proposal (as initially-posed) will make the situation worse rather than better.




A Tale of Two Token Offerings: Lessons from Blockstack (Reg A+) And Telegram (Reg D)

Telegram and Blockstack logos juxtaposed. See footer for rights and source attribution.

(*) Some of the biggest news of the past half-year on the US crypto regulatory front has been (1) Blockstack’s successful (qualified) “Reg A+” filing with the SEC and associated offering, and (2) the SEC’s lawsuit and injunction against Telegram, blocking distribution of their “Grams” tokens, sold pursuant to earlier “SAFTs” (Simple Agreements for Future Tokens, similar to SAFE notes).   Surprisingly, the latter came even though Telegram had filed a Form D for ostensibly-exempt private, accredited investor-only sales of the Grams/SAFTs under Regulation D, Rule 506(c).

It seems to me that neither event — let alone comparative lessons of the two — has been fully appreciated by the crypto community.   Thus, in this post, I wanted to highlight some main points of interest in each, and possible lessons in comparing and contrasting the two cases.


Blockstack was (in the US) a Regulation A (so-called “Reg A+”, since being expanded with the 2012  JOBS Act reforms) offering in the US which was qualified (“approved”) by the SEC on July 10, 2019 (see the offering circular here; filing index here).  Reg A+ allows for up to $50 million to be raised by an issuer per 12 months, not limited to accredited investors, in exchange for following somewhat scaled-back public company-like disclosures (thus, it is often called a “mini-IPO”).

In fact, a Reg A+ offering is, for most purposes, considered “registered” by the SEC (which will become key later in this post).  This is in contrast to offering exemptions, like the popular “private offering” (accredited investor-only) through Regulation D – Rule 506(c) offering.   Such exempt offerings are expressly not “registered”, and therefore, every subsequent transaction (i.e., resale) of the issued securities are presumed unlawful in the US, lacking any further exemption (or, simply, a registration, as in an IPO or Reg A+ filing).

This “all subsequent transactions presumed illegal” status is of course a heavy cross to bear, and many, many blockchain token issuers over the past few years (actual, and would-be; ICO and otherwise) have expended considerable resources (and incurred considerable brain damage) attempting to deal with this situation, and square it with their structure and plans (our clients, of course, have at least had some of their pain mitigated, and many have — in spite of the lack of bespoke regulations — had successful token raises).

Critically, this consideration has been front-and-center even for ostensible “utility token”-selling projects, because (1) “pre-sales” of utility tokens, or rights to them, prior to developing the promised network utility, are statutory sales of securities in the US under the Howey “investment contract” doctrine, and (2) even when network utility is created, it is almost never 100% clear if “sufficient utility” — not only in an absolute sense, but also relative to subjective purchaser (and SEC) expectations — has been established to mitigate any possibility of being deemed a security.

Add on top of that the fluid nature of blockchains and their coins/tokens globally, and the result is that a heck of a lot more ventures are worrying about US securities law than either their globally-facing posture or the nature of their blockchain tokens and networks might suggest.

Thus, a major blockchain token issuer that could “safely” permit general public token purchases and sales in the US (including resales) while still offering what is effectively a “utility token” would be a major breakthrough.

Enter Blockstack.   They were the first Reg A+ blockchain token offering of any kind to get approved by the SEC, and, quite fascinatingly, this was for a de facto utility token — not a security token, as nearly all observers had expected for the first approved Reg A+ project.  A security token would have been the “safe bet”.  But Blockstack (by all appearances) apparently really believed in the underlying model they had originally-envisioned, centered around the utility of their “Stacks” token, and its free-flowing role as critical to their network and constituent ecosystem — so they pushed to maintain their offering notwithstanding the token not really resembling a classical “security” on its fundamentals.

Now, I say “de facto” utility token because, what a Reg A+ offering (as with any securities exemption or registration) is expressly for is a security instrument.   Thus, technically, what Blockstack has done is file as a provisional security (in a “mini-IPO”), while fully-disclosing their plans to foster an evolution of the token to a pure “utility status” — at some indeterminate point in the future (implicitly, to the satisfaction of the SEC).  Their pathway to do doing such is moving the network to a “sufficiently decentralized” status.   (As far as a specific threshold condition, we don’t really know what “sufficiently decentralized” means in the SEC’s eyes in any precision yet — but Blockstack could very well be the first case wherein we find out.  On a related note, we’ve also argued here that being “sufficiently decentralized” shouldn’t be the only way for a blockchain token to become a non-security).

This indeterminate timing of the expected utility token status plus provisional treatment of the token as a security in the US is likely pretty important to the SEC’s approval of the offering.  Basically, Blockstack didn’t design their offering like a “ticking time bomb” — i.e., one which is (presumptively) a security now, but will “explode” at some specific point in the future (that is, explicitly circulate contrary to securities regulations) —  leaving the lawful securities trade status of potentially millions of (US) transactions in question.

When (and if) the Stacks token is ever deemed a non-security in the US, there will have already been a legal general public trading market for it in the US — as that is precisely what Reg A+ establishes.    In my read, this is the central concern of the SEC, much less so than whether the securities trading market infrastructure and associated panoply of compliance becomes redundant at some point in the future (because the token “is suddenly a utility token”).

Don’t get me wrong; it’s not as if Blockstack took a “no-brainer” option in undertaking a blockchain token offering this way — by their own recounting, they spent $5 million in legal and professional fees on getting this offering through (plus a 9-month review timeline — which likely doesn’t account for pre-filing lead-time during which internal discussions, legal and accounting advisory consultations, and informal interactions with the SEC were surely taking place).  (For comparison, $1-2 million for a traditional IPO is typical, so this was not “cheap” by virtually any standard).

But it was still a watershed accomplishment, and it will likely dramatically lower the cost for subsequent  Reg A+ blockchain token offerings (and simpler, plain-vanilla security token offerings, or STOs, will likely be even cheaper than offerings hewing closer to the Blockstack “model”).

Also, the offering did raise $23 million under Reg A+ (i.e., in the US), so it did “pay for itself”, and thus, was “rewarded” in the marketplace.  (Further, Crunchbase reports Blockstack raised a total of $93.8 million in 10 rounds, at least some of which was likely from Regulation S “offshore” sales, and so would not be counted along with the Reg A+ raised amount).


Telegram, the popular messaging app, went another direction with their blockchain token offering.  They did go to market well after the SEC’s July 2017 “DAO Report” (essentially warning the ICO sector that it was presumed-regulated, and that enforcement was coming).  And like many projects, Telegram responded by going the  path of performing their “pre-sale” of tokens (that is, their sale of presumptive utility tokens — but before the network and companion utility was developed) within the US in a manner meant to mollify the SEC, by (1) limiting the sales to accredited investors, (2) filing a Form D declaration pursuant to Regulation D Rule 506(c), and (3) requiring US purchasers (and to some extent, offshore purchasers) to agree to contractual resale restrictions and lock-ups for an initial period.

After this initial phase — specifically, upon a hard deadline of October 31, 2019 (if not postponed under certain conditions), Telegram was to deliver its “grams” tokens to all pre-sale investors and the general public, worldwide.

(A general note: Telegram — thanks to Regulation S of the Securities Act — was not generally restricted in pre-selling such token interests to non-US persons — and itself enjoys somewhat-limited SEC jurisdictional reach, given its status as a non-US company.  But in many ways, it clearly entered into US SEC jurisdiction.  I’ll touch on jurisdictional considerations again below).

By hopes, and at first-blush appearances, this plan was expected to insulate Telegram from charges of violating securities laws in the US with its pre-sale agreements — in particular, with respect to US purchasers of the SAFT interests (all of whom were limited to being accredited).  But as you probably can guess if you’re aware of the SEC’s lawsuit and injunction against Telegram of DATE, things did not go quite as planned.

The SEC took extraordinary action against Telegram with its suit filed on October 11, 2019 (complaint here ; cited as “Complaint” hereunder), seeking a TRO to completely enjoin (halt) Telegram’s distribution of Grams tokens worldwide until the merits of the offering were adjudicated.

(As a point of procedural detail, the court technically never granted the SEC’s requested TRO; on October 21 , Telegram and the SEC agreed to a stipulation and consent order that Telegram would voluntarily not “not offer, sell, deliver, or distribute ‘Grams’ to any person or entity” until the conclusion of a Feb. 18 & 19 2020 court hearing in the case.  I think it’s safe to assume that the SEC would have obtained the TRO even if it relied upon the unilateral power of the court — but perhaps not in time for the October 31st planned Grams distribution date.  Telegram’s SAFT purchasers also agreed to voluntarily postpone the distribution of Grams until after this hearing — sidestepping both questions of whom, if anyone, could still receive Grams, as well as whether the postponement could be unilaterally invoked by Telegram.)

(Please note that in all of the below, I am relying upon the SEC’s complaint for a recounting of the facts; which may not precisely hold.  Telegram has not yet filed a full answer which might dispute some material facts.  However, if even most of the facts are accurate, I believe the analysis and comments below are still on-point).

The SEC’s suit, at its core, is based upon two key concerns, which (in my own terms) boil down to:

  1. the Grams token has virtually no way to be a full “utility token” by the October 31, 2019 delivery deadline, relative to how Grams was promoted and the offering was conducted (and probably also in any absolute sense; i.e., of meeting some basic threshold of utility); and
  2. Telegram promoted and positioned the offering in such a way as to encourage — if not effectively guarantee — that many purchasers would act as mere “underwriters” for the initial offering; i.e., quickly “flipping” the tokens for a transnational profit, rather than as an investment in the inherent value of the token.

Addressing the first, and (I’d say) threshold concern: Telegram seems to have badly fumbled in making a strong “utility token” case, in both their communications and actual steps taken.  This left them “wide open” to the SEC’s charges.  See, e.g.,:

  • “Grams are not a currency because they have no realistic currency uses at this time” (Complaint, p. 14);
  • “Telegram sold and will deliver Grams in amounts that far exceed any anticipated ‘use’ on the TON Blockchain. For example, all but three of the United States Grams Initial Purchasers bought more than 2.5 million Grams each. Nor did or will Telegram restrict sales only to individuals who would actually “use” Grams (Complaint, p. 14);
  • “The Whitepaper .. contained a detailed list of projects and steps that Telegram and its principals would take to make TON a reality. This included describing at length Telegram’s plans for the TON Blockchain … [it] also described a long list of services that Telegram would develop to improve the functionality of Messenger and of the TON Blockchain after its launch, but that … Telegram had no reasonable prospect for completion in advance of the delivery of Grams.” (emphasis mine; Complaint, p. 18);
  • “The Whitepaper spoke of potential future products and services that investors could use in connection with Grams, but also made clear that these products were not available at the time the Offering began and would not be available by the time Defendants delivered Grams to Initial Purchasers.” (emphasis mine; Complaint, p. 24);
  • “Like other Offering Documents, the Primers made clear that that Telegram’s work would continue for some years after delivery of Grams on the new TON Blockchain and would remain critical for the foreseeable future. Both documents, for example, included a timeline specifying that the ‘[l]aunch of TON Services, TON Storage, and TON Proxy’ would occur in the year after the ‘[l]aunch of Telegram Wallet.’ The 2017 Primer explained that Telegram’s vision will not be ‘implemented and deployed’ until ‘2021,‘ and that even then ‘the continuous evolution of the TON Blockchain will be maintained by the TON Foundation.'” (emphasis mine, Complaint, p. 19; see also p. 24);

As we always reiterate around here, if you do one thing in pitching a utility token offering, don’t state that you won’t get the utility done by the time you distribute the tokens (at least, if its to, or within reach of US purchasers).

Also fairly damning, the SEC observed that far more money was raised than even Telegram itself claimed it needed to develop the blockchain per se, and indeed, Telegram was completely open about the fact that a very large portion of the money would go to other purposes, e.g.:

  • that Telegram would spend a large chunk of the raise on the core (non-blockchain) Messenger app which already exists: “… the $1.7 billion raised in the Offering so far exceeds what Defendants project they will need to develop the TON Blockchain… Defendants stated in offering documents … that Telegram would spend $520 million—or one-third of the funds raised—on Messenger alone between 2019 and 2021.” (Complaint, p. 14);
  • “The 2017 Primer described Telegram’s need for ‘about $620 million to support continuing organic user growth’ for Messenger … ” (Complaint, p. 16);
  • “The 2018 Primer similarly explained that Telegram intends ‘to use the proceeds raised from the offering for the development of the TON Blockchain, for the continued development and maintenance of Telegram Messenger, and for general corporate purposes.'” (Complaint, pp. 16-17)

This represents a significant tactical error, as funds not going to bringing about the initial core “utility” of the constructed blockchain network and token must inherently be a part of some long-term, generalized investment.

(For what it’s worth, I do not place great weight on many of the other “common enterprise” — as well as reliance upon “managerial and entrepreneurial efforts” — points made by the SEC; just because a venture is clearly a common enterprise per se managed by an inside team, it doesn’t mean that a token-purchaser is not purchasing for the sheer utility of that instrument.  This, and related points, are discussed further in this post. But the damage is clearly done with the above complaint points, most based upon express admissions of Telegram itself.)

Even assuming Telegram hadn’t made any of the missteps discussed above, it would still have a problem with respect to delivering grams tokens in an unrestricted, global public offering.  This would be based upon the reality that even if they assert the token was at the time of public delivery a utility token, any doubt as to such (especially in the mind of the SEC) would mean they are potentially unlawfully issuing a security publicly.  And if such is done globally, that means the US general public could be included (and, giving the regulators the benefit of the doubt, therein harmed).

As the SEC put it : “Defendants have committed to flood the U.S. capital markets with billions of Grams by October 31, 2019 … without filing a registration statement for the Grams as they are required to do under the Securities Act of 1933… [selling] billions of securities that will quickly come to rest in the hands of U.S. investors” (Complaint, pp. 1-2).

This is where it becomes apparent that having an exempt US offering of securities, i.e., which is a one-time, non-public event — and/or ostensibly restricted to non-US purchasers — falls short of what is needed to properly enable  US general public transactions (including resales).


Rule 144 under the Securities Act sets forth the holding period of “restricted securities” (most commonly, 1 year), and conditions for their permitted resales.   Rule 144 dovetails with the all-important Section 5 general prohibition on unregulated securities sales, combined with Section 4‘s carve-out of “transactions by any person other than an issuer, underwriter, or dealer,” to create an avenue for allowable resales for un-registered, “private” issuance securities,  as would presumptively be the case for the SAFTs sold by Telegram (and also, potentially, for the subsequently-distributed Grams tokens).

Further, after the 1 year restricted period, one would think these rules imply that restricted securities could trade freely in a “secondary market” (i.e., one consisting of resales, and resales of those resales, etc.)  — and, ignoring for a moment individual US state/territorial securities laws, they can — in principle.

The biggest catch, however (which was roundly invoked in the enforcement against Telegram), is the “underwriter or dealer” part.  If, in actuality, some of the private accredited purchasers (or the offshore purchasers) intend to re-sell their interests in grams to general-public US individuals, they are clearly falling outside the exemptions set up by Rule 144 and Section 4.   Worse, because there is no benefit of the doubt (and no safe harbor) as to not being an underwriter, the burden of proof is on the issuer as to whether every single sale instance is not to a de facto underwriter.  That means (1) it requires litigation (or exhaustive administrative back-and-forth) to prove this to the SEC, and (2) the only practical way to do so is to have procedural protections in place that make it impossible, or at least, vanishingly unlikely, for any purchaser to act as an “underwriter”.

This is where the SEC’s invocation of Telegram’s manner of sale is so devastating in its operation against them, especially that:

  • The lock-ups didn’t run the entire 1 year in any instance (“Round One purchasers agreed that they could not, without Telegram’s prior written consent, offer, sell, or contract to sell Grams that they purchased except in a series of 25% tranches starting three months, six months, twelve months, and eighteen months after they received Grams. Round Two Gram Purchase Agreements included no such restrictions”; Complaint, p. 14);
  • “Telegram also led the Initial Purchasers to expect profits by selling Grams to them at deep discounts from the price Telegram told them to expect on the day of launch, thereby encouraging those purchasers to immediately distribute Grams to the public… Under Telegram’s Formula, Defendants would price the first Gram at $0.10, and every subsequent Gram at an amount one-billionth higher than the prior sales price. As such, Telegram designed the price of Grams to increase ‘exponential[ly].’ Indeed, Telegram sold Grams to Initial Purchasers at a deep discount to an expected market price of $3.62 at launch.” (Complaint, p. 21);
  • On at least one instance of pitching to a prospective purchaser in early 2018, “Telegram spoke of the ‘chance for 0x-50x’ returns on the investments,” a prospect which was explicitly cited by the investor in agreeing to purchase $27.5 million worth of Grams “that had no use and would have no use at the time of launch, demonstrating its intent to profit from the potential increase in value of Grams.” (Complaint, p. 23);
  • “Telegram touted a readily available trading market for Grams, including one leveraging its hundreds of millions of Messenger users; sold Grams to Initial Purchasers at deeply discounted prices from its own projected secondary market price at launch; and promoted the future transferability of Grams into a liquid market”  and”[Telegram] told investors to expect a listing of Grams ‘at the major cryptocurrency exchanges’ in ‘January – March 2019,’ immediately after the ‘December 2018 [p]rojected date for [Grams] to be issued to all investors,’ making Grams almost immediately sellable in open markets, including to United States investors…” (Complaint, pp. 19-20);
  • Many sales to offshore individuals lacked any meaningful tracking of the buyer’s identity, let alone their positioning with respect to the purchase; and grams trading activity was to be allowed — and indeed, promoted as being available on — offshore on run-of-the-mill cryptocurrency exchanges, complete with inadequate KYC of buyers (including, in some cases, not even blocking US individuals!) (see Complaint, p. 3, see also p. 28).

Even worse, the SEC argues (based in part upon the points above) that Telegram affirmatively launched the issuance as an underwriter issuance — in which case, purchasers subjectively not seeing themselves as underwriters is no defense!  (I think, when the SEC cites Telegram’s secondary market listings and touts of such (as well as its hyping of resales), it is at its strongest in making this argument.  But when it claims (as it does on page 26) that the Grams token cannot even become decentralized without underwriter-like resales, I think its case is on the weakest footing.  Similarly, I am also skeptical when it argues that lock-ups are actually evidence of users’ desires to resell, as it does on page 14 — this seems a bit like “having it both ways”).

(And, for what it’s worth, I do not believe the SEC’s repeated complaints of Telegram’s having 170 million users at the outset — and even criticisms of Telegram observing such explicitly as driving “value” or “demand” — are particularly strong.   One could just as easily argue that having such an established user base, scale, and experience of practice imply that the issuer is a mature business, and hence, token purchasers won’t need securities protections.  Compare to how a contract for a new cloud service by Google or its peers is not treated like a security, even if the service is novel.  Nevertheless, there were plenty of other defects, as discussed above).

In theory, all of the above issues would be nullified by the gram’s being, without a shadow of a doubt, a non-security, as of the planned release date of October 23, 2019.  But with any doubt as to its being a pure “utility token”, the above issues compounded the damage for Telegram, and in effect, handed the SEC justification to call for a worldwide halt to the grams distribution — even though the SEC can generally only enforce with respect to securities activity within the US!

These defects render in stark relief the securities compliance pathway taken by Blockstack.  With a Reg A+ filing, Blockstack nullified the temporal question of Stacks’ security status, while simultaneously “sterilizing” the US market with respect to all secondary market resales (whether originating within the US, or offshore — i.e., from run-of-the-mill cryptocurrency exchanges listing Stacks).

Having done a Reg A+ filing, secondary market resales of Stacks are simply allowed;  explicitly, what is issued in the original sale are not considered “restricted securities”.  As a result, the SEC (in my read) essentially doesn’t care whether the Stacks tokens trade on crypto exchanges overseas, because that is clearly not a public market in the US — and if US residents happen to be able to access these exchanges, that is no different than the same persons acquiring the tokens on the secondary market within the US (which, again, is allowed, under Reg A+).

The “catch” is that any organized, formal market-based trading of Stacks taking place in the US will have to be on a regulated securities exchange (at least, until such time as the SEC gives clear guidance that the Stacks token is no longer a security).   No such exchange exists and carries Stacks as of this writing, so only informal trading is allowed in the US in the meantime.  (A related, apparently-prophylactic practice I’m aware of, is that while Blockstack is indeed engaging professional crypto market-makers overseas, they are contractually-agreeing to terminate such relationships the moment a regulated securities exchange becomes available for Stacks tokens in the US.  My guess is that this eliminates potential claims that the issuer is unlawfully “conditioning the market” for the subject security in the US).


All in all, for the amounts of money we are looking at being at stake in these two offerings, Reg A+ seems to be an overwhelmingly attractive pathway to address the Securities Act as applied by the SEC to the issuance of a pre-network, but prospective utility blockchain token.  While one can argue that the non-US company Telegram “shouldn’t have to care” about some obscure, untested (again, as applied) US regulatory election to their planned global blockchain token offering, the economics of the situation argues otherwise (particularly after initial funds were raised from US accredited and offshore investors to the tune of tens of millions of dollars).

Indeed, perhaps now that Blockstack has “blazed the way”, the SEC will work out a deal with Telegram that involves wrapping the (now-paused) Grams issuance in a Reg A+ offering (likely plus a fine).

Reg A+ as an affirmative “ICO” pathway aside, the cases of Telegram and Blockstack certainly have made vastly more apparent some important areas of SEC concern having to do with the “market-conditioning” aspects of global blockchain token offerings, as discussed above.

(* Article images courtesy of Wikimedia Commons; CC-by-SA 4.0.  Links here and here).

“Decentralized” No More — SEC Drops Proposed Blockchain Test?

Another takeaway of mine from the SEC’s April 3rd releases was noting a striking shift in gears from the SEC.  Namely, there was a conspicuous lack of emphasis on the “degree of decentralization” of blockchain token-issuers as applied to the security-vs-utility analysis of their tokens (I didn’t mention this in my earlier post, to keep it as short as possible).   Despite a focus all through 2018 on decentralization by top SEC officials, “decentralization” was only mentioned once in the SEC’s 4/3 “Digital Asset Framework” — and then only as a secondary factor, barely in passing.

Recall that SEC Director Hinman had proffered an overriding decentralization-based test and elaborated sub-factors related to it in a major June, 2018 speech (in which he famously expressed the view that Ethereum was no longer a security).    Then at Consensus Invest on November 27, 2018, SEC Chair Jay Clayton underscored these factors, using an analogy of tickets sold to Broadway plays as being securities before a show first opens, but not afterwards — because at that point “the situation becomes decentralized” (I was in the audience, among those scratching my head upon hearing this).

“Decentralized Broadway shows” no more, these considerations seem to have now taken a back seat.  (And indeed, what Clayton seems to have really been getting at with the Broadway example was that, after opening, the value of tickets sold is no longer speculative).

I think this is a good turn, despite how compelling the possibilities for decentralization that blockchain enables are.  As I’ve commented before, the element of decentralization isn’t a traditional securities factor, nor does it “map” directly to any of them; thus, to the extent it is relevant, it makes more sense for it to take a secondary role in the overall analysis.

What may be going on here is the SEC recognizing that, to the extent a token-issuing project is (or becomes) little more than open source software (with a similarly open blockchain network or networks), it is clearly not within traditional securities purview.  However, to the extent a project more resembles a speculative enterprise, for which the ultimate “test” is success or failure on business merits and acumen, a more conventional analysis applies.  And such a conventional analysis wouldn’t have much to do with how “decentralized” the project or the promoter group are.

This de facto bifurcation in the analysis is visible not only in the SEC’s “Digital Asset Framework”, but in the TurnKey Jey no-action letter granted on the same day.

TurnKey Jet was operating a tokenomics-based platform that was avowedly not decentralized — TurnKey specifically referenced how it would closely manage and control the platform, only allowing certain commercial partners to participate privately (and in that, even citing antitrust concerns — as if it didn’t truly want to have any partners at all!).

The SEC granted TurnKey’s request to issue tokens without being subject to enforcement, even though it was the exact opposite of decentralized in most respects, because of controls and limitations going to more traditional securities factors (i.e., TurnKey is a completely “closed” platform on a private blockchain, with no ability to “remove” tokens, and no use of token sale proceeds for general development).

Initial Impressions On The SEC’s Big “Digital Asset Framework” and Token No-Action Letter Releases

Important note: While I have read both of the releases discussed below in full, the following still represents a “first take”, and in any case, does not constitute legal advice.

Yesterday was a big day in blockchain legal news, as the SEC put out two releases (combined here) that arguably constitute the biggest advances in token-sale securities law policy since the DAO Report in 2017.

The two releases were a “Framework for ‘Investment Contract’ Analysis of Digital Assets” by the SEC’s new FinHub (providing a guide for determining if a proposed token sale is a security), and a no-action letter (NAL) granted to TurnKey Jet, Inc., for its sale of non-security tokens (i.e., “utility tokens”).

These releases do represent a major categorical step forward, as the SEC is showing it wants to “move the needle” in this area and be of use to entrepreneurs attempting to develop in the space, and because the SEC has not previously granted any blockchain-related no-action letter requests (and I am aware that many have been submitted since 2017).   It is particularly good that the SEC is signaling that they will look at specific projects and give a “yes or no” regulatory coverage answer (presuming the request is formulated clearly and there aren’t too many unknowns, and of course, subject to the SEC’s workload).

However, when looking at the details, the degree of advancement is quite modest, as the substance of the releases doesn’t add much to the state of thinking of counsel working actively in the space (if my experience is typical).

Taking the two releases in turn, starting with the Framework:

1. The Digital Asset Framework

The framework represents an incremental step forward in the process of determining whether a token is a security in that it makes explicit various points mentioned in SEC staff speeches over the past 1-2 years, and considerations close followers in the industry had been hypothesizing about, but it’s not revolutionary.  Mainly this is because, even while introducing some “new” useful factors to the analysis and formalizing some prior proposed ones,  it introduces a lot of implicit uncertainty about the weighting of factors.  Indeed, the FinHub staff explicitly disclaim any binding or specific aspect of the analysis (from footnote 1):

This framework represents the views of the Strategic Hub for Innovation and Financial Technology (“FinHub,” the “Staff,” or “we”) of the Securities and Exchange Commission (the “Commission”). It is not a rule, regulation, or statement of the Commission, and the Commission has neither approved nor disapproved its content.

and footnote 4:

It is not an exhaustive treatment of the legal and regulatory issues relevant to conducting an analysis of whether a product is a security, including an investment contract analysis with respect to digital assets generally. We expect that analysis concerning digital assets as securities may evolve over time as the digital asset market matures. Also, no one factor is necessarily dispositive as to whether or not an investment contract exists.

Thus, despite being the first “end-to-end” compilation of factors by the SEC, it is really still more a tool for it discussion and understanding the SEC’s thinking, rather than providing any sort of determinative yardstick, and thus raises almost as many questions as it answers.

That said, here’s a sample of some of the positive detail of the framework:

Although no one of the following characteristics of use or consumption is necessarily determinative, the stronger their presence, the less likely the Howey test is met:

The distributed ledger network and digital asset are fully developed and operational.

Holders of the digital asset are immediately able to use it for its intended functionality on the network, particularly where there are built-in incentives to encourage such use.

The digital assets’ creation and structure is designed and implemented to meet the needs of its users, rather than to feed speculation as to its value or development of its network. For example, the digital asset can only be used on the network and generally can be held or transferred only in amounts that correspond to a purchaser’s expected use.

Prospects for appreciation in the value of the digital asset are limited. For example, the design of the digital asset provides that its value will remain constant or even degrade over time, and, therefore, a reasonable purchaser would not be expected to hold the digital asset for extended periods as an investment.

Verbiage like that seems almost tailor-made for projects that have very carefully considered how to separate “utility” token sales from “security” aspects and roles, and to take proactive measures to limit unwanted speculative behavior towards tokens (as some of my clients have, including in discussions with the SEC).

A major thematic downside, in my view, was that the SEC reiterated repeatedly points such as that continued “development” of an blockchain network was a factor counting towards a security.  I hope that gets clarified more, because  a factor like this could be taken to effectively mandate that a blockchain digital service provider can’t keep improving their network/service offering in the usual course, which would place such efforts below standard non-blockchain enterprises.

Other mentioned factors of concern include (where “AP” means the project or associated persons):

The digital asset is transferable or traded on or through a secondary market or platform, or is expected to be in the future.

Purchasers reasonably would expect that an AP’s efforts will result in capital appreciation of the digital asset and therefore be able to earn a return on their purchase.

Purchasers would reasonably expect the AP to undertake efforts to promote its own interests and enhance the value of the network or digital asset, such as where […] AP retains a stake or interest in the digital asset. […] or the AP’s compensation is tied to the price of the digital asset in the secondary market.

These are very broad and open-ended, and the SEC did not make clear to what extent disclaimers might be adequate to dispel such expectations or notions of purchasers (as generally), or whether technical measures would be required, or whether it would require active preventative measures or outright prohibitions of related conduct or features to avoid any of these factors rendering a token sale a security.

An overriding legal concern is that — while it seems reasonable to introduce “new” legal factors in a sector as novel as blockchain — many of the SEC’s suggested factors are not traditional securities law analysis factors, and have little to no basis in statute or case law, so it’s not clear how well they will hold up (but for now, those that don’t plan on challenging them in court have to treat them with the same deference as traditional factors).

Of course, as the SEC said, no one factor is dispositive, but no weighting was provided — explicitly.  This is the sort of lingering ambiguity that makes it clear that even with such a “Framework”, at this stage, token sellers will still be left with no option but to request a NAL in every single case of “utility” token sale.

Finally, here’s an example of a specific non-security token example given by the SEC in the Framework that is, in my view, quite a bit less helpful than at first glance:

… Digital assets with these types of use or consumption characteristics are less likely to be investment contracts. For example, take the case of an online retailer with a fully-developed operating business. The retailer creates a digital asset to be used by consumers to purchase products only on the retailer’s network, offers the digital asset for sale in exchange for real currency, and the digital asset is redeemable for products commensurately priced in that real currency. The retailer continues to market its products to its existing customer base, advertises its digital asset payment method as part of those efforts, and may “reward” customers with digital assets based on product purchases. Upon receipt of the digital asset, consumers immediately are able to purchase products on the network using the digital asset. The digital assets are not transferable; rather, consumers can only use them to purchase products from the retailer or sell them back to the retailer at a discount to the original purchase price. Under these facts, the digital asset would not be an investment contract.

This seems good at first blush, but all the SEC is doing here is describing an internal loyalty points system with blockchain factors stripped out.  But not only does such eliminate most of the innovative elements we have questions about, this is answering a question that really wasn’t asked — which is “are loyalty points systems with no transfers permitted securities.”  The operative question is  more like: “to what extent can you add blockchain transferability to a consumer points system without the digital asset becoming a security?”

Unfortunately, until some of the avowedly-helpful factors that the SEC introduced and reiterated in this Framework receive something closer to a bright-line (or really any line) rule, most of the uncertainty in the space bearing on the “security vs. utility” question will remain (and even worse, the introduction of new factors to “watch out for” might have a chilling effect).  That is because — as the guidance repeatedly makes clear — the final determination integrating all of the factors is just an overall balancing analysis.   In other words, until there is more on-point legislation or judicial opinion, it is simply about the comfort level of the SEC.  And that is not a terribly comfortable place for most entrepreneurs to be.

2. The TurnKey Jet NAL

It represents great progress that the SEC has now granted a NAL to a token seller — and even better that it is for a “utility” token.

However, it is my sense after going through the TurnKey Jet NAL request and response that it was actually a very limited-scope NAL.  In essence, it just requests no enforcement action for a locked-in points platform that happens to be based on a blockchain instead of some other shared database technology (amongst the private network partners).  True, it also has the attributes of (1) a 1-1 token “soft peg” to USD, and (2) a “secondary market” whereby users can resell tokens to each other on the platform, so it goes a little beyond most (but not all) proprietary consumer points systems.  However, because the “lock-in” is rather extensive, namely:

  • tokens cannot be removed from the private network’s wallets (to say nothing of being listed on 3rd party exchanges)
  • tokens may only be re-purchased by the company at a discount
  • tokens will correspond to literal USD balance on deposit
  • token proceeds will not be used for any development or for general purposes (i.e., “overhead” or otherwise)

it’s not clear how much this advances regulatory clarity for a wide swathe of the utility token sector.  Importantly, the SEC explicitly hit on all of the above limiting points in their NAL response, showing that they “cared” about them quite significantly.

Thus, I find this to be a “conservative” grant on the part of the SEC — they are doing little more than assenting to a closed consumer points system that happens to be implemented with blockchain.  They arguably have to do that, because of the “economic reality” dictum of securities law.  Still, such a conservative move as a first step on the NAL front is probably to be expected, and isn’t much of a surprise.

Indeed, the biggest point of substantive regulatory progress the NAL represents may be that it validates that something like a non-security “stablecoin” — at least in the utility token (rather than financial product) context — can be a non-security.

In sum, the SEC releases yesterday are more of a “small step” than “a giant leap”, which raise the question of what the next big foray of the SEC in the token space will be — and likely more immediately, what will become of Kik’s Wells Notice response and prospective litigation with the SEC.  The latter will inevitably answer some of the factor-“dividing line” questions implicated by the releases and discussed above.

No, Airdrops Weren’t Just “Legalized” in the U.S.

Airdroppin’: Maintain extreme caution when doing this with blockchain tokens in the U.S. (Source: U.S. Air Force photo/Staff Sgt. Brian Ferguson via Wikimedia Commons).

A November 27, 2018 order in the case of ICO-gone-wrong SEC v. BlockVest, LLC (SoCal U.S. District Court), caused quite a buzz, for the ostensible holding that it (tentatively, of course, as this was not a final order) deemed the “airdrop” method of token distribution (i.e., free giveaways) permissible in the U.S.  The order denied an asset freeze that had been requested by the SEC as part of a preliminary injunction.

Undoubtedly, the SEC not being granted the asset freeze was a little bit of fresh air for the beleaguered blockchain fundraising space.  But I have now had a chance to review the BlockVest order of 11/27, and I have to say, there seems to be almost no basis to read into the decision that it is an “approval of airdrops,” or anything even remotely similar.

Indeed, I find it hard to glean from the order anything other than a recognition that substantive, evidence-based objections were raised to the SEC’s allegations of reliance on BlockVest representations by the buyers/token recipients, and against the offer as a de facto security, and consequently, the court was merely denying the SEC the privilege of having its allegations carry for the purposes of a preliminary injunction (which is a very high standard).

In other words, for an injunction which includes an asset freeze, and thus impinges upon the accused’s ability to hire counsel to defend itself, the SEC isn’t entitled to have its view of the facts, and associated legal conclusions, mechanically adopted by the court.

Unfortunately,  it is likely that the presumptions on the same questions will swing the other way for overall case disposition on the merits (assuming no new facts are unearthed), as courts will give a wide berth to a regulatory organization within its own subject domain.  So don’t get out the champagne just yet.

Further, I don’t even see much basis for the construction of the actions underlying the case as “airdrops,” or really, very comparable to them at all.  Many of the alleged investors actually did pay something to BlockVest, and indeed wrote checks (with annotations indicating that these funds were for token purchases); others deposited funds (in the form of major cryptocurrencies) on the platform in exchange for “test tokens.” So not only was monetary consideration provided by many buyers (unlike in actual airdrops), but the tokens weren’t even “live” tokens intended for eventual general public circulation — clouding the basis for the “airdrop” interpretation on two additional counts (and take heed: a future, inchoate issuance of securities can be the basis for application of securities regulation; [1]).

There are other facts that undermine the “airdrops permissible” interpretation of this decision, such as BlockVest’s claim that it knew all the token recipients personally and invited them directly to test the platform (hardly a “general distribution” of tokens, for sure).

Perhaps this order is another brick in the wall in the trend against asset forfeiture, but at the end of the day, it may reflect little more than standard jurisprudence of a court that, refreshingly, didn’t allow itself to get caught up in anti-ICO hysteria.


[1] Under § 2(4) of the Securities Act (15 USC § 77b(4)) (which refers to “one who proposes to issue any security”), a person is an “issuer” when such person promotes the sale of shares in to-be-created ventures. E.g.  publishers of “Mining Truth” were “issuers” of securities, where magazine included a paper to be signed by interested parties, labeled “indication of possible acceptance,” indicating that the signer may accept shares of stock in the proposed corporation;  SEC v Starmont (1939, DC Wash) 31 F Supp 264.

House Financial Services – Monetary Policy and Trade Subcommittee Hearing (7/18/18): “The Future of Money: Digital Currency”

Below is a rough auto-transcript of a hearing held last week entitled “The Future of Money: Digital Currency” (video available at previous link).

The witnesses were:

  • Dr. Rodney J. Garratt, Maxwell C. and Mary Pellish Chair, Professor of Economics, University of California Santa Barbara
  • Dr. Norbert J. Michel, Director, Center for Data Analysis, The Heritage Foundation
  • Dr. Eswar S. Prasad, Nandlal P. Tolani Senior Professor of Trade Policy, Cornell University
  • Mr. Alex J. Pollock, Distinguished Senior Fellow, R Street Institute

We have not yet gone through the hearing record exhaustively and produced a selection of “pull quotes” of interest. However, the transcript with links to the hearing video is reproduced here anyway, as it might be useful to some.  (Watch this space for further excerpts and comments, once we analyze the record fully).


  • The transcript was produced by a text-to-speech process performed automatically by a third party service outside of our control.
  • KrowneLaw does not vouch for its accuracy; indeed, we guarantee it is inaccurate.
  • As such, each snippet of translated text is linked directly to the point in the video at which it occurs (popup in separate window/tab).   Please use this functionality to confirm exactly what was said in each case.
  • The hearing may cover a wide variety of topics; thus, cryptocurrency/blockchain-related terms have been highlighted to assist in quick location of the relevant passages (this highlighting is by no means exhaustive, however).
  • The breaks in the text coincide roughly with changes in topic/changes in Congressperson leading the questioning.  They do not correspond to changes in speaker; thus, each block usually represents multiple speakers, including those on “opposing sides.”  You must listen to each particular segment in the video to determine who is speaking and to get the full context (and therefore, meaning).

Scroll box with transcript follows:

[00:16:01] objection the chair is authorized to declare a recess of the committee at any time and all members will have five legislative days within which to submit extraneous materials to the chair for inclusion in the record this hearing is entitled the future of money digital currency and now recognize myself for five minutes to give an opening statement today we will discuss the future of money and how digital currency may feature in it when discussing the future of money it is pertinent to have a firm understanding of its defining characteristics and history economists define money as anything that acts as a store of value a unit of account and a medium of exchange various objects have been used as money such as seashells giant stone tablets and cigarettes in prisoner-of-war camps commodities such as furs rice whiskey tobacco and corresponding warehouse receipts circulated as money on the american continent in the colonial period prior to america's independence americans imported gold and silver coins from European countries to use in trade and the colonies issued their own species before they and the Continental Congress began experimenting with paper money even the US dollar has evolved since it was declared the standard unit of currency with the passage of the coinage Act in 1792 it has undergone changes in dimensions design denominations issuer and backing notably with the implementation and subsequent abandonment of the gold standard in recent decades money has been electronically stored in bank deposits and transferred with credit cards mobile phones and the Internet cryptocurrency however was designed to be something different cryptocurrency allows users to potentially store value in unlinked store value unlinked from fiat currency on a decentralized ledger and securely transact directly from person to person across a peer-to-peer network of computers apart from a commercial or central bank the central question before us today is this our digital currencies simply a new way to hold and transfer value that will have a limited impact and nisha appeal or will it or derivative of it have a far-reaching transformative effect that will change our economy forever cryptocurrency has existed for a decade since the appearance of Bitcoin in 2009 but has flown under the radar for most of its history four years after its creation it was worth little had few users and garnered sparse mainstream media attention however the media and consumers have been taking note with a stark rise in value in 2017 Bitcoin grabbed headlines as it reached a valuation of around 20,000 u.s. dollars last December also reported our controversies such as bitcoins involvement in purchases on the online black market the Silk Road and donations funding WikiLeaks the theft of hundreds of thousands of bitcoins from the exchange mount GOx and reports that hackers have stolen 1.6 billion dollars from cryptocurrency accounts over the last seven years Congress must pay close attention to the developments in this space the capital markets securities and investment subcommittee held a hearing examining the crypto currencies and initial coin offering markets in March of this year and the Terrorism and illicit finance subcommittee held a hearing to discuss illicit use of virtual currency and the law enforcement response last month as chairman of the monetary policy and trade subcommittee I am particularly interested in any impact digital currency may have on monetary policy and the international financial system we will discuss its use both in the United States and abroad thus far some countries like Vietnam and China have banned or restricted it altogether others such as Switzerland and Malta have fostered it with a mostly hands-off approach and regulatory guidance and others have adopted it including Tunisia and Ecuador by issuing their own central bank digital currencies how odd the United States government approach this new technology is of great importance some believe as former Fed Chairman Ben Bernanke highlighted in a 2013 letter to Congress that digital currency innovations quote may hold long term promised particularly if the innovations promote a faster more secure and more efficient payment system unquote some have suggested that cryptocurrency may be a catalyst for the elimination of physical currency and a foundation for a move to a purely cashless society others say that cryptocurrencies are not suitable replacements for coins and banknotes such as European Central Bank executive board member Benoist been away coy in the chair of the Bank for International Settlements market committee Jacqueline Lowe who in a joint article in The Financial Times entitled Bitcoin not the answer to a cash flow society called crypto currencies quote something of a mirage unquote cryptocurrency has attracted advocates critics sceptics entrepreneurs investors and attention from media government agencies and law enforcement today there are well over a thousand different crypto currencies with various characteristics together comprising over 250 billion dollars of total market capitalization well cryptocurrency be the future of money are they in a bubble that will burst or even just a passing fad these are the sorts of questions we will attempt to address today with our witnesses the the chair now recognizes

[00:21:45] mr. foster that for five minutes for an opening statement Thank You mr. chairman

[00:21:52] and thank you to our witnesses I'll be brief because I am actually very interested in this topic have been for a while and I'd look forward to the testimony of the witnesses and hope to hear about currencies that are not only pure crypto but asset-backed crypto and potentially digital fiat currencies and most significantly digital fiat currencies I'm concerned that if a significant central bank could issue a digital currency that it would have the potential to supplant the United States dollar now for many transactions and even for as the reserve currency around the world and despite the reports that they're exploring at countries like Russia or Venezuela are not really credible economies that could issue fiat currencies that would supplant the dollar but if however the ECB no weird issue digital euros then I think the entire world would very rapidly adopt that for many digital transactions now which should have benefits to consumers and a number of risks associated with that as well and if there is really a credible threat that a digital foreign currency would supplant the dollar we have to be prepared to respond to that threat I look forward to hearing from witnesses on the economic feasibility of another currency supplanting the dollar and whether digitization could be a catalyst in such a transition I also look forward to any thoughts the witnesses might have on some of the decision points that have to be made when you decide to create them for example a fiat currency the currencies could be traceable or not they could be traceable only with a court order whether or not trades could be busted in the same sense that a credit card purchase can be broken if you convince some entity that the that the transaction was fraudulent and who makes that call under what circumstances these are what I see the really important decisions that cannot be evaded when we when we design a digital currency and so the issue of anonymity is is really crucial and at the heart of this as well as what sort of authentication a person will have to present to transact that anything so I look forward to this hearing very much and to yield back gentleman yields back

[00:24:13] and the chair recognizes for the

[00:24:16] remainder of the time mr. shermin for opening statement two-and-a-half minutes blockchain is a good technology but it can be used to track and transfer sovereign currency there is nothing that can be done with cryptocurrency that cannot be done with sovereign currency that is meritorious and helpful to society the role of the US dollar in an international financial system is a critical component of us power it brought Iran to the negotiating table then we argue about whether we got a good enough deal or not in the jcpoa we would have nothing had it not been for the role of the dollar we should prohibit us persons from buying or mining crypto currencies Mining alone uses electricity which takes away from other needs and/or adds to the carbon footprint as a store as a medium of exchange cryptocurrency accomplishes nothing except facilitating narcotics trafficking terrorism and tax evasion some of its supporters delight in that that if you can disempower the US government from being able to prevent terrorism narcotics trafficking and tax evasion you have somehow struck a blow for liberty that is reason enough to ban it but its role as an investment is at least as bad we have certain animal spirits in our culture or willingness to take a risk to place a bet this can be harnessed by gambling casinos which at least pay very high local taxes and created a city of Las Vegas out of a desert we can better yet harness those animal spirits to get people to invest in risky stocks startup enterprises and provide the technologies and jobs of the future or we can see those animal spirits spent doing nothing but helping create a market for tax evaders narco terrorists and others who find that the US dollar is not to their liking at a very minimum we need investor protection if we're going to have people invest in crypto currencies and crypto offering memoranda and crypto registrations are not would be considered outright fraud and reason for incarceration if they were issued by somebody selling stocks bonds or any other investment and finally there is sin I sin your age the money that we make as a country because we're the reserve currency because we can issue a greenback that does not yield interest there are people who are

[00:27:08] alive today because of the profits the US government makes on that whether it be our to fund defense or medical research all of that gets diminished with cryptocurrency I yield back

[00:27:19] the gentleman's time has expired today we welcome the testimony of dr. Rodney Garrett who holds the Maxwell Sea and mareep Elish chair on economics at the University of California Santa Barbara he has served as a technical adviser to the Bank for International Settlements a research adviser to the Bank of England and as a former vice-president of the Federal Reserve Bank of New York during his time at the Federal Reserve Bank of New York he Co led the virtual currency working group for the Federal Reserve System after leaving the the Federal Reserve Bank he consulted for payments Canada and r3 on project Jasper a proof of concept for a wholesale interbank payment system mr. Garrett received his PhD from Cornell dr. Norbert Michele who is the director of the Center for data analysis at the Heritage Foundation where he studies and writes about financial markets crypto currencies and monetary policy before rejoining Heritage in 2013 Michele was a tenured professor professor at Nicholls State University's College of Business teaching finance economics and statistics dr. Michele holds a doctoral degree in financial economics from the University of New Orleans dr. Ezra Prasad is the t'lani senior professor of trade policy and professor of economics at Cornell University he is also a senior fellow at the Brookings Institution where he holds the new century chair in international trade in economics and a research associate at the National Bureau of Economic Research he is a former head of the imf's China division his extensive publication record includes articles and numerous collected volumes as well as top academic journals he has co-authored and edited numerous books including on financial regulation and on China and India finally mr. Alex Pollock is distinguished senior fellow with the R Street Institute welcome back to the committee mr. Pollock providing thought and policy leadership on fine natural systems cycles of booms and busts financial crises risk and uncertainty central banking and the politics of Finance Alex joined our street in January 2016 from the American Enterprise Institute where he was a resident fellow from 2004 to 2015 previously he was president and CEO of the Federal Home Loan Bank of Chicago from 1991 to 2004 Alex received his master's in philosophy from the University of Chicago and a master's of Public Administration degree in international affairs from Princeton University each of you will be recognized for five minutes to give an

[00:29:51] oral presentation of your testimony without objection each of your written statements will be made part of the record dr. Rodney Garrett you are now recognized for five

[00:30:00] minutes if you can just push the button there to turn on your mic thank you

[00:30:10] Thank You chair bar ranking member Moore and members of the subcommittee the convenience of electronic transfers has led to a decline worldwide in the use of cash this is particularly true in countries where systems for transferring commercial bank deposits are more advanced Sweden's mobile payment systems wish has been adopted by over 60% of the population and cashews and transactions has fallen below 2% by value countries around the world are introducing their own faster payment systems including the recently launched real-time payments platform in the United States at the same time PayPal venmo and other private mobile payment platforms continue to improve convenience and speed of person-to-person and retail payments by leveraging conventional financial market infrastructures it seems likely that the use of cash will continue to fall and it's worth noting that there is a tipping point at which even if consumers seek to use cash businesses and banks will not want to deal with it what happens then one possibility is that people will be content to transact primarily and commercial bank deposits and things will be business as usual with a much smaller cash component to the monetary base another possibility is that people will demand direct access to some form of digital central bank issued money as a replacement for cash and the third possibility is that well people people will turn to privately issued crypto currencies like Bitcoin these options are not mutually exclusive nor are they independent the adoption rate of Bitcoin will depend not only on its performance as a money but also on the alternative forms of digital money that the central bank provides if consumers perceive that they have inadequate access to a cash like medium of exchange then they may then they may be more inclined to turn to alternatives on the other hand if the central bank offers a digital form of central bank money to the public with sufficient cash light properties then perhaps this will appease those who miss cash central banks are currently evaluating numerous options for digital currencies not just in response to the shift away from cash but also for meeting core objectives and the enhancement of financial market infrastructures ongoing proofs of concept by central banks and private partners consider the use of central bank crip central bank crypto currencies in wholesale systems only these applications are driven by efficiency and cost considerations and have minimal monetary policy implications in these opening remarks I will focus on the merits of a widely accessible retail oriented central bank cryptocurrency that could be used for person-to-person and retail transactions as suggested in blogger JP Kony fed coin proposal a retail central bank cryptocurrency could transact like Bitcoin however instead of having a fixed money supply rule the Federal Reserve would control the creation and destruction of these coins crucially there would be one-to-one convertibility with cash and reserves and hence a retail central bank cryptocurrency would not suffer from the high price volatility that undermines the usefulness of Bitcoin is a store in value and medium of exchange the Fed could also choose to implement a cryptocurrency on a per mission blockchain which means transaction validation could be performed by vetted actors who are accountable for their actions without costly proof-of-work proposals to increase access to digital central bank money have been made before Nobel laureate James Tobin proposed giving the public access to deposited currency accounts at Federal Reserve Bank's over three decades ago a number of things have changed since Tobin's proposal as I mentioned the use of cash has declined a major financial crisis may have changed some people's attitude towards commercial bank deposits and technological advancements offer the potential for issuing digital central bank money in a new way with enhanced features I offer two examples first the peer-to-peer aspect of cryptocurrencies could allow central banks to provide a digital money with anonymity property similar to those of cash whether or not the central bank would want to do this is a complicated issue that requires balancing legitimate demands for individual privacy against concerns related to tax evasion and other criminal activities second there is the potential to approve upon cash by creating what advocates of cryptocurrencies call programmable money programmable money allows trading partners to hardwire the terms and conditions of trades into their transactions so that they may be executed upon fulfilment of these conditions without relying on third parties this is particularly useful for transactions that span multiple legal jurisdictions any decision to implement a retail oriented central bank cryptocurrency would have to balance potential benefits against potential risks a common objection to expanding access to central bank money is that it could disintermediate banks however it is also plausible that it could produce healthy competition the risk of excessive dissident or mediation would be mitigated by making any new form of central bank money more like cash and less like deposits thank you and I would be happy to answer any questions thank you dr. Norbert Michelle you are now recognized for five minutes

[00:34:59] chairman bar rep for members of the committee thank you for the opportunity to testify today my name is Norbert Michele I'm the director of center the director of the Center for data analysis at the Heritage Foundation and the views that I expressed today are my own they should not be construed as representing any official position of the Heritage Foundation cryptocurrencies have rapidly expanded since the introduction of Bitcoin in 2008 and their underlying technology a distributed database that allows digital assets to be transferred without a third party intermediary holds the potential to transform the financial industry this innovation should be fostered not smothered my remarks today will provide four specific points relating to the use of cryptocurrencies cash and other alternative forms of money first electronic means a payment have become more widespread as technology has changed but paper currency cash is still widely a still a widely you form of payment the demise of cash has been widely and steadily predicted since at least the 1970s yet it remains a preferred method of payment for many people Federal Reserve reports show that cash is still the most frequently used form of payment in the US and that it plays a dominant role for small value transactions it also remains the leading payment instrument for expenditure categories such as person-to-person gift transfers food and personal care supplies and entertainment and transportation expenditures as the charts in my written testimonies show both the volume and value of currency in circulation in denominations including one all the way from one to one hundred dollar bills have steadily increased since the 1990s that's increased so retail establishments that prohibit customers from using cash as was recently reported in a Washington Post story do so at their own peril but this danger this this threat of consumers using an alternative form of payment possibly at an alternative place of business is exactly as it should be competitive processes should take place so that businesses and consumers can discover the best means of payment the fact that cryptocurrency is a new option for making payments though it is in its infant stages should be embraced that brings me to my second point which is that the federal government should not step in and tilt the playing field it should treat cryptocurrency in all other forms of money neutrally this means that it should not be so any particular legal advantage on any particular alternative form of money and that it should remove all legal barriers to using alternative forms of money removing capital gains taxes from purchases with alternative currencies including crypto currencies and foreign currencies would be a major step towards leveling that playing field between alternative forms of payment to further level the playing field Congress should even consider allowing the US Postal Service and other government agencies to accept these alternatives my third point is that these competitive forces are the forces that push entrepreneurs to innovate and improve products specifically to satisfy their customers they also expose weaknesses and inefficiencies in existing products the same comported the same competitive forces can and should be used to improve money the federal government's partial monopoly on money limits the extent to which competitive processes can strengthen money and it exposes our money to the mistakes of a single government entity nothing can provide as powerful a check against the federal debasement of money as a threat of competition from a viable from viable alternative forms of payment my final point is that centralizing cryptocurrencies within any government agency makes little sense the technology promises potential benefits because of its decentralized nature centralizing the technology at a central bank offers no particular advantage over a more traditional electronic database furthermore Congress and the administration should do all they possibly can to ensure that our central bank never offers retail bank accounts to the public whether via a central bank backed cryptocurrency or via a more traditional digital form of money implementing such a policy would give the federal government a complete monopoly of money and effectively nationalize all private credit markets no private entity would be able to compete with the federal government for funds even Ken Rogoff a staunch advocate for phasing out cash and forcing people to use only one type of digital money admits that the biggest threat to the value of currency is often the government itself that Rogoff quote is quite frankly an understatement giving the federal government the power to directly take money from its citizens with a few computer keystrokes in the name of some vague goal of stabilizing the economy simply amounts to the death of economic freedom is a terrible idea and it's Congress's duty to protect Americans from those sorts of tyrannical acts thank you thank you and now dr.

[00:39:56] Prasad you're recognized for five

[00:39:56] minutes Shimon bar and members of the committee thank you for the opportunity to testify in front of you on the implications of digital currency broadly defined for the US economy and financial system I should note that two years ago I faced an important choice one afternoon whether it is spend that afternoon buying Bitcoin which is not a trivial process or to start working on a paper about Bitcoin and digital currency for better or worse I chose the latter so today I have no Bitcoin but I do have a paper about the implications of digital currency it's useful to frame our discussion around three questions one should the government or the Federal Reserve provide services that the private sector can provide more efficiently and that is something that a cryptocurrency for instance could provide second what are the implications for the Fed in terms of its monetary policy objectives of low inflation high employment and most importantly financial stability if digital currencies become widely prevalent and third what are the implications for the u.s. role in the global financial system as when looks at the landscape of cryptocurrencies it's useful to keep one distinction in mind that is the distinction between central bank digital currencies which could use the same cryptographic technology as something like Bitcoin and then non official crypto currencies which are essentially created in the ether or a digital asset with no backing behind them unlike the US dollar which does have backing now there are many proponents of the US and other economies moving to digital forms of fiat currencies and I think there are some legitimate arguments about how that could reduce activity in the shadow economy reduce illicit activities improve the tax base and in some ways even make monetary policy more efficient even at the lower bound where the Fed may not be able to use interest rate policy anymore if all of us were to have non-interest bearing deposit accounts with the Fed which is fast becoming technologically feasible and this is what Professor Tobin had had suggested this would make a certain aspect of monetary policy implementation a lot easier but it's worth thinking about money in a broader sense money is created by the central bank but also to a much greater extent by commercial banks and I think this is going to have a serious implication for money creation in the economy because as new technologies new financial technologies more broadly eat away at the standard business model of banks and its non-bank financial intermediaries start playing a major role in the financial system the question remains what role banks play because those are the institutions that the Fed has direct control over and that are responsible for creating loans and therefore for creating deposits and a very important part of money the other aspect in terms of thinking about Fed the Federal Reserve's digital currency or any central banks digital currencies what it does to the payment systems right now the Fed has no role in retail payment systems it has a very important role in intermediating financial transactions among the major financial institutions in terms of clearing and settlement of their transactions with non-interest bearing deposit accounts one could well end up in a scenario where the Fed essentially starts managing a retail payment system as well it's not obvious that this is the ideal solution but it's worth thinking about the alternative if in fact we had a situation where both the retail payment systems and also the wholesale payment systems among banks are managed through distributed ledger technology which might become feasible then what happens in a time of crisis of confidence in normal times is actually might lead to significant gains in efficiency again the private sector might do far more efficiently under the government the management of these payment systems but the issue of trust in the central bank especially at a moment of crisis of confidence becomes really important so if you look around the world and think about central banks like Sweden that are thinking about introducing a digital version of the fiat currency the objective they have in mind is not to intrude or reduce innovation but basically to provide a backstop to the payment system to make sure that is not all in the private sector and subject to a crisis of confidence there are other concerns related to regulatory arbitrage and the possibility of cross-border capital flows again illicit as well as licit that could be facilitated which would certainly improve efficiency but also potentially also make underground activities easier to execute and finally on the issue of the u.s. dollars role as a global reserve currency there I worry less I think it's possible that if other countries were to issue their own currencies in digital form you could have the medium of exchange shifting towards non official crypto currencies towards other currencies but what preserves the US Dollars role as the ultimate global safe haven is not just the its role as a medium of exchange but its ability to serve as a safe haven and that requires us institutions which I think are still pretty strong and are going to retain foreign investors stress so I think as a store of value the US dollars will remain secure for now thank you thank you mr. Park you're recognized for five

[00:45:14] minutes thanks mr. chairman and mr. foster members of the subcommittee this hearing poses really interesting questions which to answer require some speculation and guessing along with thinking we hope among the intriguing question is whether Bitcoin or another cryptocurrency could become a successfully privately issued fiat currency that would mean being widely accepted it constantly used in payments and settlements used to denominator and other enforceable contracts and people going around and not asking what's the price of Bitcoin but what's the price of this in Bitcoin we're way away from that but it's imaginable as the chairman said the history of money demonstrates a wide variety of monies that have been used there have been numerous historical examples of private currencies but to my knowledge there's never been a private fiat currency those are reserved for the power of governments for private currency is an example circulating notes of state chartered banks were common in the 19th century you might have carried in those days in your wallet a five-dollar bill from the third state bank of Scone Creek for example or hundreds of others but all such notes were banked by the loans and investments in capital of the issuing bank they were not fiat money the dominant historical trend in money has been to create ever more central bank monopoly of currency over several centuries of development will the new and ubiquitous computing power of our time reverse this trend and create more competition and currency with dr. Michelle and the famous economist Friedrich Hayek think it might be a good idea but I don't think it will happen Bitcoin theorists imagine it will but I believe it's easier to imagine moving in exactly the opposite direction that is toward even greater monopolies by the central bank through digital money mr. foster made the point it's not only our own central bank but other powerful central banks we might think about in this context and many central banks are indeed interested in having their own digital currency so the general public not only banks could have deposit accounts with the central bank in addition to carrying around its paper currency and the appeal of this idea to central banks is natural it would greatly increase their size role and power with current technology this would clearly be possible the central bank could have tens of millions of accounts with individuals businesses associations invicible governments and anybody else and there's not much standing in the way of that in terms of pure financial technique but would it be a good idea no it wouldn't in such a scheme the Federal Reserve would be in direct competition with all private banks it would be a highly advantage to government competitor and it would be regulating its competitors that's what central bank evolution tried to develop out of in the American banking system they're about twelve trillion dollars and domestic deposits could a Federal Reserve digital deposit account system grab say half of them why not and it'd be six trillion dollars which would expand its balance sheet to ten trillion dollars now what's key in this is to remember that on if you have deposits on one side of your balance sheet you have something else on the other side so what would the Fed do with this mountain of deposits and as as my friend Norbert said well it would have to have to make investments and loans it would become by this means the overwhelming credit allocator of the American economic and financial system I think we can safely predict its credit allocation would unavoidably we politicized and the taxpayers would be on the hook for its credit losses the risk would be directly in the central bank as opposed to central bank support of somebody else so as as norbert said i think to have a central bank digital currency is one of the worst financial ideas of recent times still it's quite conceivable to think of as a possibility and it's good for us to think about it in conclusion I think if we look at the money of the future digitalization will continue but I don't think the fundamental nature of money will change it will surely be the monopoly issuance play it by a central bank it might be a private currency backed by reliable assets I don't think it will be a private fiat currency like Bitcoin and as we consider all this an increase in the monopoly power of central banks which already have too much should be avoided and thanks a lot for being able to share these views thank you for your testimony in the chair now recognizes himself for five

[00:50:33] minutes for questioning let me just start with this idea of cryptocurrency potentially supplanting or displacing US Federal Reserve notes as though as a as the world's reserve currency and this is for anyone who wants to chime in with greater use of electronic payments and the advent of digital currencies do you think demand for US Federal Reserve notes will decrease and what what implications does that have for the US dollar I think if you look at why the US dollar is as strong as it is and is in demand as it is you have to look beyond just the fact that we have a Federal Reserve that prints Federal Reserve notes we have an economy with strong property rights especially relative to many other countries in the world we have incredibly developed well developed industrialized infrastructure here and as long as you combine those things and have a dynamic economy then the the assets of that kind of that economy including the money that's predominantly used in that economy are going to be sought-after so that's what you should focus on if you want people to want our money if you want people to want to use our money and there's also a downside to being the the world's reserve currency and that's that we can basically sort of continue the fiction that we can print as much as we want and lend as much as we want and that's frankly not a good idea so I that's just not the way that I would think of those things anybody else want to comment on that mr. Paulk another way to think about that is that the United States does have has had and continues to have as my old friend John Macon used to say a competitive advantage in wealth storage services and that's a an advantage it arises out of social infrastructure all the things that Norbert said rule of law enforcement of a contract a strong financial system and of course a powerful government enforcing all of that and I think that will continue but we talked about bank notes and US dollar paper currency does circulate around the world as we know nonetheless I think the electronic forms of money certainly in the wholesale markets will become ever more dominant in spite of the advantages in some situations that paper currency has like privacy dr. Prasad do you want to it is difficult to see an asset that has no intrinsic value and no backing by the government maintaining value as a store of value the initial promise of something like Bitcoin is said me it might become an effective medium of exchange and that promise hasn't quite panned out because it turns out that it is very inefficient and very costly to transact using Bitcoin so in fact many of the non official crypto currencies that are gaining more traction as mediums of exchange are in fact ones that are backed by fiat currencies or other other forms of backing so there is one called tether for instance which is backed one for one with the US dollar and that is beginning to get a traction as a medium of exchange so ultimately the US dollars were just pointed out is maintained in its dominant role through u.s. institutions and the trust in the Federal Reserve let me follow up by basically well by starting with a more kind of fundamental question you talked about the volatility of digital currency and maybe that is the principal reason why it's not the best medium of exchange right now or store value but and it's very core is our crypto currencies money and and and by anyone to chime in on this and if not if crypto currencies are not money do they substitute as money do they function as money substitutes dr. Garrett yeah on that point I would point to Hayek who who didn't you like the word money as much as he liked the word currency are youing that that's a property so I think can have currency it's a different extent and so is Bitcoin money well you know I you know for regulatory purposes I mean we may not want it different to define that way the IRS CFTC has defined it as a commodity because that's necessary for for regulatory purposes but in terms of the conceptual idea of is it money it is to some extent but it's not currently a very good one for the reasons that have been articulated it's not very good as a medium of exchange because the price is so volatile that means that or a store value but as a medium of exchange it's not good because if the price is if we think the price is going to go down I don't want to receive it and if I think the price is going to go up I don't want to spend it so this volatility undermines its features both as a store of value and my time is about ready to expire but it would would what is properties as money improve what is quality as money improve when its volatility declined based on adoption rate is adoption rate all that is required to improve its qualities to get to money yeah I mean people have to start using it for transactions I mean I mean if that happens then the price volatility might start to decline the adoption rate has a lot to do with the way Bitcoin itself is set up has a lot to do with its own volatility but that's only one cryptocurrency but yes so I would just in general say yes the adoption rate has a lot to do with it my time is more than expired I will now recognize dr. Foster for five minutes thank you and thank our witnesses again um you know recently there were reports in the press the estimates of a about 20% of all Bitcoin had been lost which strikes me as implying that whatever government or central bank issues digital fiat currency if that was a representative numbers it would be a tremendously profitable enterprise to be a if if 20% of your cash never you know came back to be redeemed and that's in addition to the interest expense if there is no interest paid on these digital instruments and so it strikes me that whatever country starts doing this and becomes a de facto standard is going to have a permanent cash cow and do you see anything wrong with that analysis and Iverson and I'd say for any issuer of currency you like to have your currency lost or put away someplace you remember American Express checks which were kind of currently used to used to encourage you to put them in your attic and save them for the future which was tremendously profitable for American Express and you know and the other there have been some concern here that somehow there'd be a big evil government monopoly taking all over all banking functions it seems to me it would be pretty self limiting if there was no interest paid on these things yeah average person would maintain just a convenience level amount of this and not have all of their net worth in something that paid no interest and so it seems like you just have a reasonable fraction of everyone's net worth usable for short-term transactions and and then they would separately in a very competitive banking and investment environment allocate the main bulk of their of their investments elsewhere do you see anything wrong with that analysis Yes Doctor yes I do I think the Fed would pay interest just as they do I'm sorry yeah well as they don't on cash yeah just to be clear the notion that is being floated right now is of non-interest bearing deposit accounts right now this is not clear proposal there are different ways of thinking about how to set up a central bank digital currency but the notion of deposit accounts is of non-interest bearing deposit accounts so the concerns that you could have this asset superseding other assets is highly unlikely because again it will be a zero nominal interest rate yield instrument

[00:58:28] just like cash currently is in regard to your concern about potential technological malfeasance this goes back to the 7th century when paper currency was printed when counterfeiting was a prior concern and that's remain to this day one could argue that digital forms of fiat currency could reduce the concern about counterfeiting of paper currency but they are on the flip side and in most issues here there is a one side on the other side but the flipside here is that certainly they would make them very vulnerable to technological hacks and this is why I think most central banks are very concerned about moving forward very aggressively with this because of technological vulnerabilities that are potentially out there you know and so the the promise of blockchain is that it provides essentially a non falsifiable ledger that that would prevent a lot of malfeasance I think the kind that you still will I think forever be worried about is the business of authenticating the person who has access to move these balances around and and operate that system and that's remains an unsolved problem in the digital world is you know how you really oughta get yourself for different levels of transactions dr. Garrett I'm what how does actually Sweden handle this issue in their proposal you know for example in the Swedish proposal do swipe fees just disappear and that you can you can pay and how do you deal out of Sweden deal with a problem if someone steals your cell phone or your identity somehow and proceeds to spend a bunch of money you know is there a mechanism to get your money back when a fraudulent transaction has taken it away from you I think if you're regarding to the to the current switch system this is a system that's run by the central bank in cooperation with private banks so these are these are still centralized accounts so in the event that your your cellphone was was lost you would still have access to to go to the bank reveal your identity and and and get your account reinstated or you could probably just do that online so that the sweet sweden has has has issued as something called an e Crona report where they're considering alternative new technologies to deal with the replacement of cash but those are still just proposals okay and among those technologies that they're considering is a store value technology and in China which has just massively apparently adopted digital transactions for consumers at least that is that essentially a on account of the two big players whose name I forget to only pay and whatever the other one is so these are essentially everyone has a balance on their and I pay you by transferring some of my balance in all II paid to you or is there some government operation behind it or central bank operation behind in Li Chen essentially is based on using the WeChat platform and the Ali pay platform but with balances that are already at your bank account so you can link it to your bank account what Sweden is considering is two options say they register based system where you have this electronic deposit accounts like I mentioned or a value based system are essentially a download digital cash onto your electronic wallet which could be like a credit card so those are the two options in Sweden that are being considered thank you Yeomans time has expired the chair recognizes the vice chairman of the subcommittee mr. Williams from Texas Thank You mr. chairman and thank all of you for today's hearing we're in the exciting first stages of the digital currency movements adaption by mainstream stakeholders and it's become apparent to many that blockchain and other new technologies is the digital currency space offer solutions have the potential drastically alter the financial sector that does business as as Congress and regulars determine how best to treat these emerging products we must be mindful of the impact our actions have on innovation and the free enterprise at the same time however it's important that policymakers keep in mind the legitimate governmental interest in preventing the use of anonymous digital currency by those who wish to do us harm I look forward to discussing with the experts today on the best path forward so my first question dr. Michele is you state in your testimony that Congress had worked diligently to eliminate tax and other legal impediments to the development of alternative currencies as well as new applications for blockchain technology what are the impediments to development of alternative currencies new applications for blockchain technologies and what can Congress do about them I think the main one honestly I do believe is capital gains tax the fact that you have to contain keep track of basis in every single transaction you would make that's a that's a major impediment to using anything other than the US dollar for your transactions so that's the biggest one otherwise regulator on a regulatory side I think if we look at ESA Bank Secrecy Act any money laundering laws ensuring that nothing is treated differently yes it is true that criminals have used Bitcoin but criminals also have used airplanes computers and automobiles we shouldn't criminalize any of those instruments simply because criminals use them those components I believe are the main barriers to using tutto a more widespread adoption of these things in the u.s. thank you my next question is dr. Garrett your testimony presents three offices for consumers in the event that cash is no longer available to them number one used commercial bank deposits for everyday transactions number two demand direct access to gentles digital central bank issued money and thirdly turn to privately issued cryptocurrencies so what would cause consumers to choose options 2 and 3 when option 1 is an existing from major technology that has already become an increasingly convenient as a payment method so so first of all let me say that I I agree with what you said at the end there I mean there's this there's nothing wrong with our current banking system and people have been very and as I mentioned in my testimony new means for transferring commercial bank deposits are constantly arising it's increasing the ease with which we make not only person to business payments but particularly peer-to-peer of payments person-to-person payments so in those scenarios all I outlined the first scenario is probably the most likely but as cash actually disappears that starts to create problems in a society Sweden is currently dealing with this and the governor of the rich Bank recently wrote an opinion piece where he talked about some of the pain points that are that occur when casual and physical cash really starts to disappear and when stop receiving it and so what I'm really talking about is that that future scenario and at that point the central bank has to decide if it wants to withdraw completely from providing a payment device for the general public or whether it wants to offer some sort of digital alternative and one of those digital alternatives could be possibly down the road some form of crypto currency that's it's offered by the central bank and the primary reasons for doing that I think one would be if you wanted to allow some type of privacy component within transactions of this currency like it's currently possible with cash subject to limits and as I said balanced against the risks of tax evasion and criminal activity these are the options that the central bank will ultimately face and and and my argument is that these are something that we should be prepared for okay let me stay with you dr. Garrett with the dozens of digital currencies out there all the different attributes that make classifications difficult what is the appropriate framework for us to use if Congress approaches legislation addressing the digital currency well that's a very difficult question that's why I ask you to you well there's people have the ability to issue these private currencies and they and they're going to exist and I think just like dr. Michael said one can't make something illegal just because it might be used for illegal purposes what I'm arguing is that the is that you know I believe that the central bank does a good job at providing payment services and not only just at the interbank level but also for small payments by the public and I think the central bank should continue to provide the best possible product along those lines and what I'm arguing is is that in a future date that best possible product might involve some of these new technologies but but issued by the central bank's to me remain competitive with those payment devices as opposed to some of these private currencies which which you know our less able we're less able to monitor and and less able to tell men's time has expired that the chair recognizes the gentleman from California mr. Sherman it seems like some think tanks demand that every turn that we do things that make the federal government less able to meet its financial obligations and then they demand that we have a extensive and expensive foreign policy that costs well over a trillion dollars there's no way to square that unless we abolish Social Security and Medicare we have moved from a gold from 2,000 years ago to drafts and paper currency symbolizing gold to wear the paper currency itself has value and now for many decades what has value is paper that represents the paper I pay my rent with a check which represents paper dollars which as recently as the 1930s could be converted into gold but can no longer be and we now have an opportunity to disempower the federal government and to move that power to those a hostile to it the we need a medium exchange we need a unit of value the witnesses have demonstrated that the dollar is much better at that for honest citizens but crypto currencies offer unparalleled advantages to nations that the US government wants to sanctioned for their terrorist activities to tax evaders and criminals mr. pollak what is the this seems to be a solution looking for a problem what can an honest citizen not do to store value to effectuate a transaction I can be in the smallest hamlet in rural India and use my Visa card I've never had a problem paying somebody unless they didn't have the money so it's a good we have pretty efficient mostly digital transfers of dollars every day what's the problem we're trying to solve except for the problem that the narcotics dealers have the I think the proposal being made for private fiat currencies which as I said congressman strikes me as an unlikely outcome a private fiat currency as opposed to a convertible currency is to give optional ways of settlement for anybody but I mean I've got a means of settlement called the dollar what is the great failure and you have another one called the euro and I have many many choice you 100 views you have leases of gold so so what problem do I have that they're trying to solve unless I'm a tax evader or a narco-terrorist I don't think we can go first of all I'm not pushing I'm not pushing as you know this solution I am trying to illustrate that it is a solution only to the problems of tax evaders criminals and terrorists but I you might and it offers an opportunity for profit by speculators speculating on a currency whose sole value is to help by the aforementioned near do Wells go ahead you might argue that people should deserve just as I think dr. Michel did and in my written testimony there's a quote from Friedrich Hayek on this the freedom to choose the denomination of the transactions they want to they want we should allow people to own guns in many circumstances but if the sole advantage of a particular gun is that it has a special tape on it to prevent finger prints from adhering and you would say the honest citizen who wants to hunt wants to make sure that the deer cannot identify the finger prints of the hunter I would say the sole benefit of that particular tape on that particular gun is to facilitate criminals what other than facilitating criminals and allow people place bets on the value of some of a of a criminal tool I mean who can speculate the value of burglars tools what does this do what problem does it solve can you identify one because I can't I I don't know the extent to which crypto currencies are used in this criminal way I suspect they are some to some extent but so is cash yes rifles are chiefly used for hunting rifles with design not to have fingerprints on them or prey usually predominantly used for crime the gentleman's time has expired and the the bells signal that boats have been called on the House floor we will recess for votes in a moment but we will go to mr. Hill for five minutes of questioning then we will recess and we will return and for members who have not had an opportunity we will reconvene for the remainder of the hearing for your questions after votes at this time we will ask mr. Hill for his five minutes of questioning Thank You chairman bar appreciate the time to a very interesting panel I was at the u.s. chamber this morning talking about FinTech and the advantages of exploring how blockchain can change business economics and accounting and logistics very interesting topic today we're talking about something that is the the headline which is constantly chatter about currencies and when I listen to the your testimony I just have flashbacks not personally of course to the 1830s I'm thinking about Wildcat banking when we had no central bank thanks to President Jackson's insistence that we didn't need that and every state in every business and every town issued script or currency I have a book in my at my house of obsolete script and currency that's a collector's guide and it's very thick so help me mr. Pollock understand that that why is this any different I mean I can't imagine that anyone privately issued cryptocurrency could be any more accepted than another you know big picture since why is it not like Wildcat banking of the 1830s congressman I think it's exactly the same as I tried to suggest in my testimony I I said in my written testimony I have in my collection maybe my book isn't as fat as yours a nice copy of a $3 bill issued by the Wisconsin Marine and Fire Insurance Company which acted as a bank in the 1840s in this period you're talking about I think it's exactly the same except those currencies did have a claim on the assets of the bank if the bank had good assets thank you for that and dr. Michele you know the I think if I remember article one right coining money is a enumerated power of the of the Congress not the Federal Reserve System yet I'm always in fact chairman of power got the question this morning like chairman Powell can decide to do crypto currencies at the Fed where is all this this would still be pursuant obviously to Congress directing that we do this and so tell me your views on on that legally legally I mean I I hate to venture a guess because they they seem to be able to do quite a bit without legislation this is no surprise from your testimony yes thank you but I and then dr. Prasad a question for you you talked about potentially because of blockchain truly an innovative area that potentially you would make some forms of money or credit I'd say obsolete like an account payable receivables for example people wouldn't necessarily have as big a line of credit so you're concerned about future credit creation and open market operations I assume that's where you were coming from and your testimony artifact about the previous congressman's question about what is the point of crypto currencies there are many inefficiencies and that lurk in the financial system including ones that result in crisis but also if you think about payments either using your visa or if you think about cross-border settlement of transactions those are painfully slow sometimes quite expensive and these technologies in principle provide a way of getting around those issues they in principle again I as emphasized that could make transactions much easier to verify to follow through they could ensure finality of settlement of transactions and bring down the cost you're not quite there yet but that's the prospect and that could affect the traditional model of banking especially as non-bank financial intermediaries we talked about Alipay and Alibaba and China they take over and that could affect how the Fed thinks about financial stability and the transmission of monetary policy as well thank you very much in my in my time remaining mr. chairman since this is the monetary policy committee I have to come in to our viewing audience and to my colleagues mr. Pollock's recent writings on the 40th anniversary of the humphrey-hawkins Act one of my personal favorite laws and we celebrated today quietly here as we had Trimble tamarin pal testifying and I've always always find the goals of humphrey-hawkins odd you have full employment and price stability so I didn't get to ask my question and I'll let you have the last word mr. pollak how is price stability consistent with perpetual inflation setting an inflation target it is not that's one of the great mysteries of the Federal Reserve how stable prices which is actually the term in act is consistent with their announced strategy of perpetual inflation thank you that's one of the great mysteries of Finance I yield back a

[01:18:11] gentleman yields back

[01:18:13] from those good questions and I am informed that because this is going to be an extraordinary lay long vote series on the House floor we may be losing members and so our reverse course and call on our colleague from Ohio for the last set of questions for the hearing and that is Warren Davidson who is now recognized for five minutes

[01:18:37] for the final question of the hearing thanks for the bonus time chairman and

[01:18:42] thank you all for being here I assume you're relieved a bit so you won't be waiting for us for an hour and a half or two to get back over here so thank you for your expertise in this and I think just beginning with the nature of currency what is our currency and part of the stability of the US dollar lies not just in the resources of the United States but in the resources of the world the petro dollar everyone has to settle their current account at some level in u.s. dollars because everyone uses crude oil and so we have an effective monopoly on settlement there and it dealt somewhat effectively with the problem of mercantilism involved in gold so prevented hoarding because the oil isn't hoarded of course Congress continues to tap the Strategic Petroleum Reserve so I assume eventually maybe we can find find an end but in the background of that what creates the stability of money and I and I guess I want to get at in crypto currency we use the word for everything we use it for crypto securities that are really nothing more than you know non-voting shares and companies in some cases this is what the SEC is trying to regulate we've established that that numerous of these crypto commodities or effectively commodities but we're not quite sure that their currencies mr. pollak you summed it up well by saying there's a big gap between how much is this in Bitcoin and and so I guess that's the question I'd like the panel to explore maybe mister Michelle would you like to pursue dr. Michelle the question specifically being the nature of money in in crypto so what makes it what makes it what would make a cryptocurrency a currency not just a commodity not an asset how do you move from whether it's Bitcoin or petrol coin or Michelle coin we're in coin I like the sound of that one that's good if if we're talking about a medium of exchange then what we have is either a currency or a substitute for currency or a substitute for money if it's all digital maybe we shouldn't call it currency but the idea is a is what is the medium of exchange and my whole point is that people should be allowed to use whatever medium of exchange that they want to use the the fact that many people think that the Fed is great and the Fed is fine and we should just stick to the central bank that we have that's that's wonderful if nobody else ever believes that way and hardly anybody adopts any alternative form of money then there's no problem nobody's going to use one but if somebody comes up with something better then we should allow that to take place because you highlighted earlier you had it earlier that the government shouldn't shouldn't favor one or the other well we clearly do we coined the money and we have the official money we have the legal tender in the United States mr. pollak how do you see migrating that path for something to really become a currency to be a currency as I tried to suggest in my remarks be readily accepted in settlement of payments and debts and to be a unit which is used to denominator acts and that and that means that people in general believe that that currency is going to be available and accepted by other people and they have to believe that other people accept that and and everybody else has to believe that other people will accept that as well it's a strange social creation money that comes out of out of belief backed up by sets of enforcement of the great history history of money high garius to think about yeah I'll just build on that I mean I think I think what you're what you're really getting at with your question is you know why it is Bitcoin have any value at all and as mr. Pollock just said for a currency to have value and to function as a currency it simply has to be the case that you accept it from someone on the belief that someone down the road will accept it from you one of the interesting things that that makes that work apparently with something like Bitcoin is the is the currency supply rule there's a fixed rule for how the money increases over time but that's known and fixed and so you don't have to worry that the issuer of the currency will behavior responsibly and devalue it so that's sort of a fundamental aspect that gives Bitcoin dial you once once somehow that process has started where people have started to believe in it but it also is is it can be problematic because it means that you you have a fixed role and you are not able to provide currency in a way that might be beneficial in general for the economy thank you so much I'm sorry I couldn't get to everyone and Frank they couldn't get to nearly all my questions but nearly universal liquidity I think is the defining characteristic and then we can't get to the store of value related to petrol but thank you so much for your

[01:23:57] time and thanks for your indulgence

[01:23:59] chairman thank you for your questions

[01:24:01] and thank you for yielding back your time and I'd like to thank all of our witnesses for their testimony today again I apologize for the brevity of the hearing I think we had a lot of members with a lot of interest but because of the interruption of votes we will have to end this hearing a little bit early but given the fact that digital currencies and crypto currencies will continue to have a greater and greater impact on our financial system and the broader economy I'm sure we'll be revisiting this issue and exploring this topic further in the future without objection all members while five legislative days within which to submit additional written questions for the witnesses to the chair which will forded - the witness for the response asked our witnesses to please respond as promptly as you are able this hearing is adjourned you

House Agricultural Committee Hearing (7/18/18): “Cryptocurrencies: Oversight of New Assets in the Digital Age”

Below is a rough auto-transcript of a hearing held last week entitled “Cryptocurrencies: Oversight of New Assets in the Digital Age” (video available at link).

The witnesses were:

  • Mr. Joshua Fairfield, William Donald Bain Family Professor of Law, Washington and Lee University School of Law, Staunton, VA
  • Ms. Amber Baldet, Co-Founder and CEO, Clovyr, New York, NY
  • Mr. Scott Kupor, Managing Partner, Andreessen Horowitz, Menlo Park, CA
  • Mr. Daniel Gorfine, Director, LabCFTC and Chief Innovation Officer, CFTC, Washington, DC
  • The Honorable Gary Gensler, Senior Lecturer, MIT Sloan School of Management, Brooklandville, MD
  • Mr. Lowell Ness, Managing Partner, Perkins Coie LLP, Palo Alto, CA

Here are a few “pull quotes” and exchanges of interest (this is by no means exhaustive):

    • Rep. Soto (@1:42:08): “I’m more concerned though about being able to avoid money laundering for terrorism, drug trafficking, human trafficking, tax evasion — so I’d love to hear from each of you in one sentence on what we could do to stop money laundering and having Bitcoin and other cryptocurrencies be the choice of terrorists, drug traffickers, and those evading taxes.”

      Mr. Fairfield: “Trust FinCEN to do their job.”

      Ms. Baldet: “Rely on other law enforcement mechanisms that work around strong cryptography — we do not weaken roads to add potholes to them.”

      Mr. Kupor: “Bitcoin is actually the worst tool to money launderer because every transaction is registered and fully recordable so it’s actually law enforcement’s best friend”.

      Mr. Gorfine: “While the technology can be peer-to-peer, most activity takes place through a new type of intermediary where you can apply AML and KYC rules.”

      Mr. Gensler: “On top of that, rigorously require crypto exchanges to register — and you may need to pass a law to do that — but to make sure they register and that all the AML, anti-money laundering and know-your-customer is being done there.”

      Mr. Ness: “The alleged Russian hackers were caught because they used Bitcoin.”

    • Rep. Faso (@1:45:01): “I’m wondering if for the benefit of our viewers at home across the country who are watching this hearing and are trying to understand the impact of the crypto currencies and what the future holds if if perhaps miss Baldet and Mr. Kupor could tell us where you think from a five to ten year view point where this is going to be the role that these currencies are going to have in our economy and how might this affect average consumers — right now it’s the market participants are mostly very sophisticated people do you see this insinuating itself into the broader economy?”

      Mr. Kupor: “Thank you yes so we believe that this really is gonna create a whole new set of of infrastructure on which all kinds of new applications are going to be built — some which we may not even know about today. So if you think about all the benefits we’ve reaped from you know Facebook and Google and all the kind of you know internet properties have been built today.”

      Rep. Faso: “… and negatives …”

      Mr. Kupor: “… and negatives — I think what the beauty of this technology is is it gives us a new set of platforms and again very critically those platforms are not controlled or governed by centralized corporations; they’re controlled and governed by community, and so you can imagine all the utility that we have today but where the consumer actually has ownership of data the consumer has the ability to actually ensure that data is shared in a manner in which they want to be shared and the consumer also can capture the economic rents from use of that data; so we think the opportunity in that respect is endless.”

    • Rep. LaMalfa (@1:51:30): “Would you touch upon what what would look like if that token is determined to be a security?…”

      Mr. Ness: “Yeah I think the issue really comes down to friction and while we can get to a status of free trading securities by registering them, even when you do get to that status there are all sorts of ancillary friction[s] in and around the transfer of a security — you need to have broker dealers involved, and you need to have suitability requirements met and other potential disclosure issues and so forth that are ongoing; and so when we’re talking about trying to create the next generation of decentralized protocol layer kind of apps on top that are all interoperably-interacting with each other and transferring value at the speed of software to deliver a service to a consumer — it may it may be all transparent to the consumer that this is all happening under the hood –but you can’t have fundamentally the transfer of value at the speed of software if it’s a security.

      Rep. LaMalfa: “Please touch on the importance of increasing the access to the speediness of those types of trans transactions — why is that important?

      Mr. Ness: “Well I mean, to get a little philosophical I suppose I mean you know ledger technology is fundamental to Commerce, right, and double-entry accounting was an amazing innovation and ledger technology that, you know, pulled Europe out of the … Dark Ages, and the same thing can happen in in in a amazingly more robust way when we start to literally not just allow parties to trust each other through standard mechanisms of reconciliation, but when we remove the reconciliation or the need for it all together… and that is simply a philosophical point of view I suppose but it goes to this issue that we’re at early stages of this, we don’t know where it’s gonna, go but speed is probably a good thing.

      Mr. Gensler: “Could I just say I’m an optimist I agree with what mr. Ness says, but maybe it’s the MIT in me now, I think that the beneficial ownerships will be able to be tracked in a matter of milliseconds and nanoseconds — not yet, it might take five years — but we’ll get there; technology’s pretty neat how it grows and helps us.”

    • Rep. Davis (@2:01:54): “I want to ask you a quick question sir; based on the way current law is written, it’s not cut and dry whether cryptocurrency should be regulated by the SEC or the CFTC.  If Congress attempts to come up with a workable definition for cryptocurrencies that are more similar to commodities — you know call them as we’ve heard blockchain commodities — what should we be looking at to guide us?”

      Mr. Gorfine: “You know I the one thing I would say is that — and I mentioned this in my opening statement — that it’s important that we’re not hasty in terms of figuring out what the right contours are of applying… securities laws and then the the commodities framework. I do think that the SEC has in due course been providing additional clarity — there was recently Mr. Hinman over at the SEC, gave a well-received speech kind of outlining some of the SEC’s thinking as to how they would apply the securities law framework — and some of the things that I think you’ve heard are factors around decentralization, you know are their expectations of return based on meaningful work of others… Rhese are important elements that — of course are not you know I’m not saying that these are the only elements — but these are some of the things that you start to look at in terms of figuring out well when does it make sense to be applying the securities laws framework that includes things like required disclosures, it requires regulations around you know the offering of securities, and the intermediaries involved in securities, and when does that perhaps not fit the product. So I think that this discussion is ongoing, and I think that in due course, and being thoughtful you’re starting to see additional clarity and uncertainty coming out. But certainly those are some of the factors that we’ve we’ve heard talked about a fair amount.”

      Ms. Baldet: “To tag on to kind of the last question but also the the concern about regulatory framework, you know what I was mentioning is about a need for clarity more so than the, not so much the bright lines that we’re talking about with security versus commodity, as much as more interest in safe harbors for innovators; especially because we’re seeing the market adapt to this in that new disruptors are at an advantage versus incumbent institutions who are waiting for regulatory clarity to engage. And so in a way, in the absence of that, it’s not it’s not necessarily that incumbents are incapable of innovating or they don’t understand the technology, but they have to take a sidelines approach because they have traditional businesses to lose.”

      Rep. Davis: “Well thank you… We want to make sure that we devise a regulatory structure that allows this industry to continue to grow, but allows to us to address many of the law enforcement problems that have been brought up here by many of my colleagues — so I can’t wait to continue to work with you; thanks for your time.”

Again, we have not yet gone through the hearing record exhaustively. However, the transcript with links to the hearing video is reproduced here anyway, as it might be useful to some.  (Watch this space for further excerpts and comments, once we analyze the record fully).


  • The transcript was produced by a text-to-speech process performed automatically by a third party service outside of our control.
  • KrowneLaw does not vouch for its accuracy; indeed, we guarantee it is inaccurate.
  • As such, each snippet of translated text is linked directly to the point in the video at which it occurs (popup in separate window/tab).   Please use this functionality to confirm exactly what was said in each case.
  • The hearing may cover a wide variety of topics; thus, cryptocurrency/blockchain-related terms have been highlighted to assist in quick location of the relevant passages (this highlighting is by no means exhaustive, however).
  • The breaks in the text coincide roughly with changes in topic/changes in Congressperson leading the questioning.  They do not correspond to changes in speaker; thus, each block usually represents multiple speakers, including those on “opposing sides.”  You must listen to each particular segment in the video to determine who is speaking and to get the full context (and therefore, meaning).

Scroll box with full transcript follows:

[00:16:06] well good morning everyone hearing on committee of Agriculture and title crypto currencies oversight of new assets and the digital age will come to order please join me in a quick prayer never really father we ask you Lord for blessings on this meeting this morning we've got some things to understand that are new and different and we've got a great panel that's here to visit with us this morning I also want to lift lift up Collin Peterson his family during these times bittersweet and your thoughts and prayers with him as well help us to to do your will and to be the kinds of people that that will honor you we ask these things in Jesus name Amen just a quick word caller Peterson's not 8 half year old father passed this week and so our bittersweet but he was telling me a wonderful story that his dad was apparently had his faculties right up to the very end which is pretty darn good so our thoughts are with you go he's hanging in there he could remember the crop prices from 1952 you know I mean II knew everything yeah all right so well good morning we've got a terrific panel this morning I see a lot of new faces as in the audience today for the big questions up on a lot of folks Minds is what's the Agriculture Committee doing with cryptocurrency and and the distributive ledger technology but we're here to find that out this morning so for those of you that not joined us before welcome we're happy to have you as we discuss an emerging policy area that is of deep interest to our members to the emerging into crypto industry and we hope to all Americans of all stripes Digital SS like Bitcoin and ether but also hundreds of other token-based projects that are being developed represent a new way for people to interact and exchange in commerce with one another while digital assets are often thought of as payment systems or digital gold I believe the promise that token networks hold is more Universal and more exciting quite frankly than that for the first time we have a tool that enables individuals to reliably exchange value and a digital realm without an intermediary we could have assets that exists can be created exchange consumed at digital form the promise of being able to secure property rights in a digital in digital space may fundamentally change how people in people interact with one another this technology holds the potential to bring enormous benefits to each of us if we're willing to give us the space to grow provided providing a strong clear legal regulatory framework for digital the SS is essential to that end there are several questions before us about how law should govern the issuance trade and utilization of these digital assets perhaps no question is generating greater uncertainty than how to determine if a particular token is a security we generally know that it would what to do if a commonly traded asset is in fact deemed of security we simply apply the securities laws if it's not a security there's a good chance it's a commodity which will be subject to the requirements of the Commodity Exchange Act the problem seems to be in making that determination how we test which concerns the sale of orange groves and service contracts to the 1940s as offered presented as a standard test to determine if the securities laws govern a token yet they have provided they prove to be challenging in the analysis under this as an analysis under this test a related question is whether or not current laws are appropriate for these new digital assets if a token is derm is determined to be a security or a commodity or something else a regulatory regime need not be static if it's necessary Congress or regulators may want to consider developing a new framework that takes into account the diverse characteristics and unique economic relationships and Bennett in many of the types of digital assets that can be represented by tokens providing clear guidance to enable developers to determine the nature of their token and then suitable rules will enable them to develop their project is essential to both project protecting the public and promoting innovation how we regulate these products and those who develop them won't determine if they're developed or used but it will determine where they're developed in use and we want them that innovation done in our country as we consider changes to the laws or new regulations the Committee on agriculture will be part of that conversation within the house we have a vested interest in the definition of a security because it directly impacts the definition of a commodity similar to our work in agricultural commodities as well as futures and swaps markets the committee has a strong interest in promoting safe efficient transparent markets for those who use these new toá-- Marcus properly regulated Marcus promote innovation and foster economic growth and I don't believe there will be any different with respect to digital assets of course proper regulation does not mean intrusive regulation that means regulation appropriate to the nature of the activities and the participants and in some cases it might mean no regulation at all before watcher narake you remember I want to thank all of our witnesses for making time to prepare testify we have an incredibly qualified panel to present all sides of a fascinating and complex set of issues I welcome to please each one of you here today for this conversation and with that color I'll turn to you for any comments that you might want to have Thank You mr. chairman and thank all of you for joining us here today and I'm happy that we have a chance to review this new net new technology and our role is to oversee via CFTC regulation of it if that's appropriate as a CPA and someone who's found a career helping folks run numbers on their finances I still am having a hard time getting my hands around this and I have some real concerns one crate cryptocurrency that we need to pay special attention to is its volatility there are some of you that will tell us that the fluctuations in cryptocurrency are a good thing and part of its appeal but the increased speculation and the fact that regular investors stand to lose their shirts give me a great deal of concern as one study found over 80% of the initial coin offerings are scams while regular investors stand to lose a very small amount Santa Lou is a very small amount stand to gain for example 97% of Bitcoin is held by just 4% of the participants and cryptocurrency there's a lot of things here that don't make much sense to me and who knows maybe some type of this technology will come along and really make a difference after these starts and fits but as it stands right now I'm skeptical it's our jobs to be the adults in the room and to ensure that in these early days there's enough oversight of this new frontier to ensure that it can grow responsibly that I look forward to your testimony and I yield back

[00:22:32] thank you mr. Peterson so chair would request other members submit their opening statements for the record so that our witnesses may begin their testimony and to assure there's ample time for questions I'd now like to welcome our witnesses to our table first off we have Joshua Fairfield dr. mr. Joshua Fairfield the William Donald Bain family professor of law William Utley University the University School of Law in Staunton Virginia we have miss amber bald a co-founder and CEO of clover in New York New York we have Scott Cooper managing partner of andreessen horowitz midlow Park California we have mr. Daniel Gore fine director lab CFTC and chief innovation officer at the CFTC here in Washington DC we've got welcoming back for another round of conversations of the Honorable Gary Gensler who currently is a senior lecturer MIT Sloan School of Management and then we've got mr. Lowell Ness managing partner Perkins Kui Palo Alto California so we've got a terrific panel and with that we'll go to mr. Ferrell you what everybody have five minutes to pitch your wares and we've also got your opening statements for the record so with that mr. Fairfield your fair feel you're recognized talk come on Thank You mr. chairman Conway ranking member Peterson and members of the committee for the opportunity to address you today my remarks are going to try to set some context and they're organized around two questions we've heard a lot about Securities and commodities but how are people actually using cryptocurrency tokens and given that how should regulators proceed on the first question blockchain which is the technology underlying the current rash of cryptocurrency and tokens is a new decentralized database technology many communities have formed just to see what the technology can do and they're trying different experiments the potential value in these experiments is considerable collaborative communities of artists new forms of corporations fast and low-cost check settlement digitization of securities open and low-cost electronic mortgage and secured transactions filing systems secure international remittances voting systems and many more are possible applications of the technology my testimony today will focus on potential for blockchain technology to expand personal property rights online this is my primary area of research and my conclusions are and I'll continue them below that first citizens need and want an expansion of personal property rights online the cryptocurrency tokens are helping them do that by solving important problems in building markets for digital property and that we need to be cautious when regulating overlapping spaces and use cases such as systems in which most people hold a token to use it or consume it and a few hold it to speculate on the price on the second question how do we go about conducting oversight common-sense construction of how groups are using the technology a so-called duct test will help regulators begin to sort out whether and where to engage rough agency consensus can handle these conflicts and hearing such as this one are critically important for regulators to start working out the overlaps because many many more applications of this technology are coming so in the body of my remarks I'd like to discuss how this technology represents a badly needed expansion for personal property rights online we should really care about good property rules for intangible electronic digital assets good property rules preserve citizen independence property institutions build individual wealth and social welfare by reducing transaction costs and property permits us to express ourselves by changing and arranging our environment to reflect what we want here you might think of your own home or your wedding ring for example but personal property rights like this have had serious trouble coming online we just don't own that much personal property online consider that people used to have record collections now they have a subscription to Spotify people used to have bookshelves now they have Kindle accounts this is because early in the history of the internet intellectual property holders were worried about illegal copying it took several decades to develop a technology blockchain the database technology underneath cryptocurrency tokens that can be traded held bought and sold but not duplicated so far until now property institutions haven't really gotten the benefit of internet technologies because it's too costly to record all the transactions we can't have a database of ownership for every Barbie doll in the entire country right it's too costly however token systems can and will reshape all of these ways of owning if they push price points low enough the way the internet did for basic internet communication in some blockchain technology is not just used as a security it's not just used as a commodity it's used as a way to unstick personal property law for all of us online but it's only going to do it if we let it so what's the path to successful oversight responsible regulation has to rest on a frank and common-sense determination of how people are using this technology working out the jurisdictional questions is going to be time-consuming but it's not particularly harder than for network communications technology generally we've just had to hand these things out and figure it out tokens do present some challenge specifically they may be used in different ways by different members of a community they may be used at different times in different ways but most importantly the nature of the use by a community can shift a community can be trying to do something entirely legitimate and have speculators come in and begin to disrupt the purpose of the original community the current hot characterization debate is whether token sales ought to be deemed regulable unto the Howey test I believe instead the Howey test represents the outer bound of where we should look we should look inside that outer bound to figure out what the beneficial and damaging uses of the technology are if a community is using cryptocurrency tokens like securities then they should be regulated as securities but if they're not they shouldn't and that's the most important edition in conclusion blockchain technology has enabled new communities and new business forms it has also provided the technological basis for a badly needed expansion of personal property rights line and for purposes of regular regulatory jurisdiction a rough common source common sense sorting into buckets will do more good in the near term than precise definitions of what a cryptocurrency token is that is a lost cause a cryptocurrency token wears as many hats as humans give it it is an entry in a database it is a technological entry and nothing more in the current characterization debate what this means is that a token should be deemed a security when it operates like the collective security a commodity when it operates like a commodity a currency when it operates as a currency and as a simple property interest when it operates as a simple property interest thank you so much thank you for

[00:30:05] spare feel ms bell day 5 minutes chairman Conway ranking member Peterson and members of the committee thank you for the opportunity to be here this morning I'm amber Baldy co-founder and CEO of clover a company building tools that make it easier to build decentralized applications on top of both publicly accessible blockchain networks and access control distributed Ledger's previously I led the blockchain program at JPMorgan though I'd like to note that my comments today do not represent my former employer I also currently sit on the board of the Z cash Foundation a nonprofit organization seeking to advance the state of the art for privacy technology as applied to Internet infrastructure and privacy preserving cryptocurrencies these are a variety of disparate hats all of which lead me to the same message my commentary today concerns the importance of a cautious and thoughtful regulatory approach to innovative technologies even and especially those that might disrupt business as usual or add to the complexity of regulating the Internet as both critical infrastructure and a shared public good we must determine how to balance the enormous potential value of this technology with the need for consumer protections and national security and how to achieve this while respecting human and constitutionally protected rights so far money seems to be the killer app for blockchain much as the early Internet killer app email continues to be a cornerstone for how we communicate online peer-to-peer payments will likely grow into and persist as a ubiquitous part of our personal and professional daily lives in fact the ability to spend trade rent or license other sorts of unique digital bearer assets could be applicable to many things we own mortgages securities collectibles intellectual property rights personal data etc imagining this mature interconnected global ecosystem of such markets feels like standing in the 90s and imagining Netflix streaming on your phone and yet my concern is not the speed with which we reach that end state it's the choices that we make along the way which stands to be as hotly contested and impactful as net neutrality the DMCA FASTA cesta or the on-again off-again discussion of state mandate mandated week cryptography continues to be while we struggle to overlay existing regulatory frameworks onto new technology that is useful precisely for its fluidity other areas of the world are embracing that ambiguity and learning by doing in Afghanistan for example code to inspire helps train young women for technical careers and pays them in Bitcoin which they can use in local shops as well as global marketplaces in a place where women's banking and even physical agency is limited financial autonomy and Digital Inclusion is a powerful force for equality and democracy in some African countries and places with less legacy financial infrastructure companies are using crypto assets to enable farmers to properly track and register their commodities and increase their bargaining power in downstream market pricing not only can end consumers tip their farmer in support of fair and sustainable working conditions but every other factory or wholesale retailer along the way can make more informed decisions about the provenance of inputs to their products in the United States square whose business strategy is already based on disrupting traditional payments processors has added the ability to buy sell and transfer Bitcoin into its mobile app and there are many products targeting cryptocurrency investors and early adopters there's also several more experimental projects that are interesting for example using economic incentives to battle fake news cryptocurrency micropayments as an alternative business model to data hungry online advertising and fluid marketplaces for unused disk space on your home computer as a disruptive force too centralized cloud storage these projects all launched as initial coin offerings icos either on a new single purpose blockchain network or as a token on top of an existing network like aetherium are often compared to the internet startup boom of the 90s the ability to quote unquote code oneself out of business is a novel property of these decentralized blockchain applications but most experiments today invoke a variety of human controlled workflow checkpoints and escape hatches to allow intervention if necessary along with understanding who controls access to the network and who can modify the rules of the system identifying who controls these escape hatches might be helpful in sorting tokens into various asset classes once the sensible taxonomy has been established as a counterpoint blockchain is not the answer to every problem for example I recommend extreme caution with exploration of blockchain based Evo ting ensuring one-person one-vote while keeping ballot selections private is an incredibly complex computer science and human coordination problem that we are not ready to tackle yet internationally it's no surprise that some of the central bank's most aggressively investigating cryptocurrency as an alternative or enhancement to their existing currencies are in Venezuela Russia and China going forward as there is inevitably more discussion of the potential for a digital dollar I encourage strongly encrypted privacy preserving design choices coupled with opt in selective disclosure as opposed to options like mandatory cryptographic backdoors or golden keys which could make the US financial system a very attractive target for nation state sponsored cyberattacks and hackers as that conversation matures you must clarify how FinCEN oh fak and other relevant rules can be applied modified or interpreted to balance many competing interests so in conclusion and hopefully even and hopefully if this committees guidance is simply a strong commitment to non-interventionism safe harbors for innovators and work towards resolution of the patchwork fabric of state laws the time it takes to come to such a commitment have the unfortunate effect of eroding America's early mover advantage in technical innovation and entrepreneurialism thank you thank you


[00:36:06] mr. Baldev mr. Cooper Thank You chairman Conway and ranking member Peterson for the opportunity to be here today to talk about this very important new technology my name is Scott Cooper I'm the managing partner for a firm called a H capital management which manages about seven billion dollars worth of venture capital assets and very recently also for a group called cnk capital management which is a 300 million dollar registered investment advisor fund focused exclusively on investing in crypto related assets I'd like to spend my time today to focus on why we believe as investors that crypto technologies make a very compelling investment opportunity particularly for members of the venture capital community and I want to start with a definition that's different from the definition I think that we often hear about so if you focus on a lot of the public narrative today around crypto technologies there are two kind of dominating narratives one is certainly around Bitcoin and price fluctuations and volatilities which we heard certainly from the ranking member today as well as well as what are called initial coin offerings I see owes for capital fundraising as investors though we're interested in the broader ecosystem and we use the term crypto networks to describe what we think about as that ecosystem very specifically crypto networks for us means a new way to build digital services and by digital services we mean any internet application that obviously may exist today so ride-sharing applications social media applications and probably a whole host of things of course that we haven't even thought about but where those digital services are owned and operated by a community of network participants rather than by a centralized corporation now I realize at first blush that when you think about community ownership and management of an asset that may seem odd but in fact if you look at the technology industry there's actually a significant precedent for the existence and success of community based networks in the development of a significant portion of technology first is what is known as the open source software movement this started back in 1983 actually at MIT by a professor named Richard Stallman and at the time it was a very very radical notion the idea was that a community of developers would publish and then freely offer their software to others who could modify that software who can incorporate it into various other projects it was really in many respects a very liberal movement around opening up and reducing kind of copyright initiatives and software if you fast-forward to today the open source is the predominant method of software development and software utilization today in the world for any data center you go to which is obviously where major corporations run their internet applications Linux which is a major operating system is by far the dominant operating system in play and for all of you who like myself who walk around with your cell phones all day long the vast majority of components in your cell phones are what are called Android and the centrally open-source software so the history of open-source software I think is relevant for how we think about the potential for what bit coin and crypto networks can be the second important historical analogy is around what we call open protocols which really form the foundation of the modern internet that we all use today an example of this is something called SMTP which is the protocol that we all use for email transmission it's an open protocol it was governed in many cases by open communities by networks by academics and in many cases with government funding and many people built applications on top of these open networks precisely because they knew that the nature of that protocol would not change they could rely on the steadiness and the consistency of that protocol on which to build applications so if we look at technology open protocols that are well developed and well maintained can become the building blocks on which massive customer utility and economic growth can be built it's also the case however if you look at the startup world that many startup companies have failed by relying on what we called platform risk which is building on other platforms that are governed by centralized corporations and then finding that the rules of the road change over time and that really does significantly handicap their efforts as a result of this what we now see in our business is many developers are hesitant to take on this platform risk and are instead looking at things like crypto networks as a new and innovative way for developers to create new digital services without the Intendant risk that comes from depending upon centralized platforms in many ways crypto networks borrowed from the nearly 50 years of history in the technology industry which shows that communities of developers can share their work openly and properly govenor network without centralized authority but crypto networks also introduce a very powerful economic incentive that didn't exist in these prior generations the presence of what we call touken which creates a direct financial incentives for members of the communities to in fact develop and govern the networks appropriately the token really in a sense is the glue that binds the various players in the ecosystem and provides the appropriate economic incentives for all market participants understandably so this creates a whole new set of challenges for regulators consistent with recent statements that we've heard from the director of corporate finance at the SEC we believe that the regulatory nature of crypto networks varies with the stage and development of a particular project briefly when a centralized sponsor is seeking to raise capital from investors prior to the functional development of the network this is probably and what is known as an investment contract and therefore properly regulated as the security however the nature of the tokens that are delivered on that contract can ultimately be regulated as commodities once the fulfilment of that investment contract has occurred as stated by the CFTC some tokens are not securities once the network is functional and in particular in cases where the network is decentralized from an ownership perspective we believe the nature of the tokens looks more like commodities and securities and therefore probably rightly should be governed by the CFTC this is precisely because there's no centralized sponsor on which the efforts of the value of the token are largely depend instead the tokens have value based upon the utility of the service to participants this actually looks much more like the way commodities trade in conclusion the US has long enjoyed the fruits of an age innovation in the form of economic growth job growth and consumer utilities stemming from many of the great technology companies of our time and we believe that crypto networks present a new and exciting opportunity for us to continue on that trajectory doing so however will require that we develop a regulatory framework that encourages risk-taking and capital formation provides clarity and certainty to market participants and of course protects individual investors and the integrity of the markets thank you for the opportunity to be here today Thank You mr. Cooper mr. gore fine five

[00:42:10] minutes Thank You chairman Conaway ranking member Peterson and members of the committee for the opportunity to testify before you today I'm chief innovation officer and director of lab CFTC at the US Commodity Futures Trading Commission the testimony presented here reflects my own views and does not necessarily reflect the opinions or the views of the Chairman or the Commission in May of last year chairman giancarlo announced with bipartisan Commission support the launch of lab CFTC the agency's effort to help create a model for regulatory engagement and modernization in light of the ongoing digitization of our markets its mission is to facilitate market enhancing innovation inform policy and ensure that we have the technological and regulatory tools and understanding to keep pace with inevitable change the building blocks of our effort our engagement testing and experimentation and education shifting to the primary topic of today's hearing we are interested both in private or permission distributed ledger technologies that can improve market infrastructure and in public block chains that require the use of a virtual currency developments across this spectrum have society rethinking the nature of money how people transact and how we can more efficiently engage in regulatory economic and market activity with respect to public blockchains proponents note that they unlock digital scarcity enable efficient transfer of ownership and power the execution of applications and all of this can be done without the need for a trusted central intermediary that was traditionally needed to verify that each party has and does what it promises many however appropriately worry that virtual currencies and tokens may be used for illegal activities and are prone to fraud manias and bubbles driven by potential misunderstandings and myths regarding their scalability utility and intrinsic value with recent hype around this space there has also been a proliferation of icos which may be intended to raise capital for a venture and may bear the hallmarks of a securities offering our colleagues at the SEC have been thoughtfully addressing related challenges and providing additional clarity to the marketplace and from the CFTC's perspective given the potential to tokenize a broad range of economic assets it is important to remind the public that digital assets can also be commodities or derivatives depending on their terms and how they are structured given the potential and the challenges of this space chairman Giancarlo has made clear that the proper response by regulators is not to dismiss the entire movement as misguided or foolish but rather to take the time to learn facilitate the promise guard against risks and bad actors as part of this effort lab CFTC published its first FinTech primer on the topic of virtual currencies in October 2017 the primer explains that the agency determined in 2015 that certain virtual currencies such as Bitcoin are commodities and therefore implicate our jurisdiction the CFTC has regulatory oversight authority over futures and swaps markets based on commodities and that has anti fraud and manipulation enforcement authority over these and the underlying commodity markets it is important to note however that we do not have oversight authority over these underlying markets additional details regarding CFTC oversight of crypto related markets and enforcement and education efforts since the self-certification of Bitcoin futures in December 2017 can be found in my written testimony moving forward one thing is certain none of us are able to predict exactly where this innovation is heading it is accordingly incumbent upon us as a 21st century regulator to continue studying learning and keeping pace with change we look forward to ongoing close collaboration with our regulatory peers including through the eff Sauk digital asset working group we all have the shared goal to educate market participants target bad actors and ensure an efficient and effective regulatory framework we are also focused on bringing clarity and certainty to the market but need to be sure that we are thoughtful in our approach and do not steer or impede the development of this area of innovation while some may seek the immediate establishment of bright lines the reality is that hasty regulatory pronouncements are likely to miss the mark have unintended consequences or fail to capture important nuance regarding the structure of new products in the late 1990s during the early days of the internet senior government advisor policy advisor IRA Magaziner made the following observation that given quote the breakneck speed of change in technology government attempts to regulate are likely to be outmoded by the time they are finally enacted end quote given this dynamic the government largely avoided a prescriptive approach in favor of principles focused on educating and empowering law enforcement and allowed the this area of innovation time and space to develop all while maintaining the ability and careful vigilance to act to ensure market integrity this approach generally seems like the right one when dealing with new technologies which are largely agnostic as to how they are used the role of the regulators to facilitate use of new technologies that can benefit markets and the public more broadly while deterring and pursuing those who seek to use technology to do harm thank you and I'm happy to answer any questions you may have thank you where's Korra find mr.

[00:47:28] Gibbs our five minutes thank you good morning chairman Conaway ranking member Peterson my condolences on your dad's passing it's good to be with you all here today I think I've testified in front of you a dozen or two dozen times and some previous capacities but since I was last with you I took on a new role at MIT where I am engaged yes in researching teaching lecturing and advising on digital currency and blockchain technology now I say that but for those who don't know because some are new I also chaired the Commodity Futures Trading Commission for four or five years and before that long ago I was 18 years ago Minh sax so I bring from my years in finance my years in public policy and now I guess as an academic some perspective of what I've learned and with the chairs permission one thing I've learned as an academic is to ask the audience a little bit about their engagement in Bitcoin so again with the chairs permission if I could just see us how many members of this committee have invested in crypto currencies and I'm going to ask the audience to so we've got the show line in the audience Bob Cheryl the audience yeah we've got about half the audience that's an interesting split there we go I would say the other thing that splits the community in my discussions usually as if this is not a community that splits normally like right and left Republican Democrat this is a community that splits more about Bitcoin maximalist and Bitcoin pessimist or you know skeptics or one and and by the way some of those skeptics and pessimists or Republican and some are Democrats some are Nobel laureates some are in finance whether it's Jamie Dimon or Warren Buffett and then some of the max les can be a venture capitalist like an andreessen horowitz and elsewhere so it's interesting this wit in the community I'm probably a little bit center maximalist if I can say that you know I am an optimist on the underlying technology you'll also hear some people say well not that Bitcoin but the blockchain technology is good and they kind of split their their views that way so again what have I learned blockchain technology I believe has a real potential to transform the world of finance because it is about money it's about moving value on the Internet this new technology could lower costs and risk in the financial sector second to reach its potential I feel strongly that and for public confidence to reach its potential we need to bring it inside the world that we know the long-held public policy frameworks know what are those frameworks Congress has a role to play to tinker about these frameworks I've just say what are our historical frameworks about technology and finance we guard against illicit activity like tax evasion or money laundering we insure for financial stability and we protect investors and consumers those are the three big ones we protect against illicit activity we insure for financial stability and we protect investors everything else is debatable and you we need to adjust the details underneath that third the SEC and CFTC do have a role to play both of them have roles to play they've released numerous notices and enforcement actions and so forth however there's a lot of non-compliance I mean there are thousands of entrepreneurs out there they're probably right now are not complying with SEC guidance and they're fewer that are not complying with CFTC guidance but that's just because the CFTC doesn't have ever cited this thing called the initial coin offering market and and that's where there's a lot going on and this thing's going large and big it's about two hundred and fifty billion dollar market quarter of a trillion is getting some size I mean the overall capital markets in the world are about 250 trillion they're 300 trillion so it's not threatening that but thousands of eyes cos have been raised twenty billion dollars of capital formation I'm here to say nearly all of them I don't know if it's 98% or 97% but nearly all of them are probably securities under our securities laws because they're being offered in a pre functional time this IC o---- markets rife with scams and frauds forth bad actors have figured out how to use this new currency sometimes it's state actors we learned last Friday was the the alleged I should say with the alleged 12 Russians spies Venezuela tries to raise it off of their oil and outrun US sanctions policy v while federal agencies are engaged current laws apply to this activity there are gaps so if I convention a few of the gaps first I think that there's gaps around the crypto exchanges themselves either where you can buy and sell why because they're being right now regulated through state money transmission laws this approach regulating them like Western Union or money grams just not satisfactory because crypto activity is more complex and it's harder to trace and it doesn't build on top of the traditional banking system it's built on something that we can't see that's out there in other countries like in China and Russia so second the crypto exchange is lack broker to access they don't have brokers so there's no brokers by the way sending 1099 bees and my detailed testimony says you know maybe the IRS should do something about that so you can just have reporting of the gains third the issuers of securities the crypto space are only slowly coming into the SEC Rimet I think this is going to take two three four years before the SEC really cleans up this space and so there's gonna be a lot of caught can they go faster can we do it right but it's gonna take take some time forthe crypto derivatives are being handled by the CFTC I think they're doing it well but there's two things that worry me about the technology and one is that the under ret unregulated underlying crypto cash market is a mess so the corn and wheat markets that you ever see the the gold and the oil markets we have some we have a lot of history we have some confidence of that about that and then the CFTC can do their job layering over those underlying commodities the CFTC is regulating derivatives but they're referencing an underlying market where it's just at best the Wild West and at worst it's a it's it's pretty bad so about that underlying market the CFTC has general anti-fraud and any manipulation authorities with regard to it but I think the Congress will be debating it probably not in this Congress but I suspect in the next session the next Congress you all will be debating should you give the CFTC additional authority or maybe some other agency you know maybe it will be the SEC somebody else but I think the CFTC to have additional authorities about that underlying what I would call cash crypto market it's 70% of the market the SEC has securities the CFTC had derivatives I think you want to debate whether to do something about the underlying market and lastly I think you'll need to give them resources along with your friends over at the Appropriations Committee because I think these agencies will need that thank you

[00:55:03] thanks mister mr. Ness five minutes

[00:55:06] thank you all for inviting me to testify this morning I certainly agree with everybody that's gone before me that this technology does have the potential to be transformative one of the questions I get asked a lot is why don't we just call these things securities we have securities regulations we could create a scenario where these things get registered and then become quote unquote freely tradable so why not just call them securities deal with existing laws and I think the the problem with that is they exhibit some characteristics of securities during certain phases and not in others and especially when we get to full functionality when it's a truly completed product that is being sold the intention of that product is to be used in a network and that really can't happen at least not at the speed of software which is really the the fundamental principle here behind these decentralized protocols is to allow for value transfers truly at the speed of software you can't do that if everybody's got to be a broker dealer and all the intermediaries have to interact in a way that that would be appropriate for securities so we need to come up with a fairly novel and and you know pragmatic approach to dealing with the fact that there needs to be some investor protections particularly in the early stages while the thing is a PowerPoint deck and an idea in somebody's mind but find ways to create some clarity around how and when it goes from being sold as a security to being sold as a commodity and that is a very important imperative right now because we are seeing so much activity frankly and the the threat of sort of people going offshore for lack of clarity is a very real one I say in my 25 years in Silicon Valley I have not seen circumstances where you go to a meet-up in places like you know Palo Alto or even San Jose and you see regulators from zhuge Switzerland and Singapore and Hong Kong and Bermuda and and an end and so to avoid any kind of race to the bottom I do think that there's a serious imperative about getting something done before we have a situation where we're trying to entice people back into the country because then the standards would really have to be lowered to do that so I think we have an opportunity now if we get ahead of the truth light but that's an important idea around why we need some of the bright lines to that end I did in in some of my written testimony include some materials and a proposed regulatory framework that both talk about what the existing laws say and how the existing laws treat these so-called utility tokens and you know there's sort of a 50 page memo on how the existing laws work to avoid having to go through that 50 page memo type analysis with each and every one of these I think the bright lines are really what's necessary so there's a regulatory framework that we've been thinking a lot about too that would create that that set of bright lines that would enable the regulators and the regular you know the companies going out there to really know how to sort the good ones from the bad ones and and I do think that starts with kind of this test around how we and the investment contract analysis for you know regulating securities as securities in the in the primary offering in you know if they're being sold sort of pre functionality before they're before they're fully functional but coming up with ways to say that once they are fully functional how do we let them now trade as commodities effectively and the trading is important because as I said this is the movement of value to have value it needs a price and the markets really are a necessary part of this so the fact that there are secondary markets is is a key part of this they need to be able to trade in those markets to establish price they also need to be able to you to be used in their networks as non securities and so we need to come up with ways to say when they're being sold to investors as investments let's treat them like securities when they're being used in the network or they're being traded in the secondary markets let's call them commodities thank you well thank you mr. Ness the

[01:00:15] chair remind members that they'll be recognized for questioning in the order

[01:00:19] seniority for members who were here at the start of the hearing after that members will be recognized in order

[01:00:24] arrival I appreciate my colleagues understanding and I'll recognize myself for five minutes yes I agree with you that if we don't get this right and we flush the innovators offshore into other countries that getting it back is a lot more difficult so hopefully we at least this start of the the process with this hearing that we can get to an answer that doesn't do that mr. Baldev mr. Cooper you each noted that tokens and crypto networks had the potential to create next-generation open Internet protocols can you flush that out a little bit for the layman and myself that understand the words but if you could think that tell us what those actually mean it'd be a little helpful sure thank you so when we say open open means a couple things in this case we mostly mean open access when we say public blockchains which means that anyone can join the network it has to do with the degree of gatekeeping which is not necessarily an all-or-nothing kind of a decision but we can if we start thinking of public blockchains as being more like a public Commons it's a lot more like the Internet where and you have a lot of choice as how you how you access that sort of network we also usually mean open source as mr. Cooper mentioned so that we're allowing auditing of that code which increases trust of the code and most of the the core technology that powers the backbone of the internet is open source I agree with all that I would just just to give you maybe a very specific example imagine in the future you know a social network today right you have as users of social networks of course you have an intermediary in many cases a company like a Facebook who obviously is taking and utilizing the consumer data and then obviously developing relations with advertisers and others as a way to monetize that data that's their business model in the future utilizing a crypto network you can imagine a world where you as the user own your data that data is cryptographically secured and you choose which data you want to expose to various advertisers or other promoters and the flow of economic value in that case as opposed to going through an intermediary might be going directly from an advertiser or a promoter of products to you as an individual as you've kind of governed the use of that data so that would be kind of in very broad terms the way to think about kind of expansive view of what this could look like alright mr. penafiel you talked about the Howey test which seems to be the gold standard among securities lawyers who can spell that last night can you you talk about that be maybe the outer edges just where one of our questions were trying to answer is are these securities are the commodities and where does that transition occur and is it you know where could you talk to us better about this how he test and why do you think that's the outer agent and just how should it apply to to distinguishing between commodities and securities certainly there are two questions the first is lawyers are inventive they can rework the formal form of a transaction to make it into anything how he describes the outer limit of the kinds of legal forms that can be turned into investment contracts that can be turned into this sort of exchange I give you money now and I wait and I reap the benefit of your labor on the other end but the difficulty with that is that while courts must be able to look to the economic realities of the transaction look underneath the form because if we just look at the form if we just look at what it's called then anyone can just title it can title the asset whatever they want at the top of the piece of paper and escape whatever regulation they want so courts have to look past the formal titling of the asset to the economic realities of it however they also have to understand that the very flexibility of these tools both the flexibility of legal forms and the flexibility of this database technology means that it is very possible for people to be using a product for one entirely legitimate purpose and have other people begin to use it for different purposes an example of this from outside of the cryptocurrency area entirely would be the discussion we had several decades ago on VCRs right the question was some people use them to make illegal copies many people don't how far are we willing to go in rooting out bad uses that are beginning to cut away a healthy tissue and that's why I believe Howie is the outer circle it's it's it's necessary that it be there so that SEC in this particular case can reach cases in which people are labeling something one formal legal form but are actually engaging in an investment contract that's what it's there for but it doesn't really tell us anything about what the regulatory landscape should actually look like at the end of the day in fact the regulatory landscape in my estimation should and will look like something substantially different it will look like a bit of a handoff like a relay race in which for certain functions and under certain conditions one one overseer may have authority under so I lost your mic Thank You mr. Fairfield ranking member five minutes Thank You mr. chairman um I don't know where to start you know I'm somebody that believes we should still be on the gold standard and that I think we should honor the Fed because I don't really trust them you know so what worries me about this is that you know you say there's 250 billion dollars of capitalization here or whatever how much money is actually here I mean I just this is just seems like a Ponzi scheme to me it's um you know I mean I think the stock market is is a casino you know that's where I'm coming from so I mean so if I you know I'm gonna send a hundred thousand dollars to somebody through one of these deals who's gonna stand behind it you know where's the you know so I give the money I guess to one of you guys and then you turn around create these things and send it to somebody else for what in the meantime what if you went broke I mean I was involved when we found out about credit default swaps and figured out that everybody was trading these things and there was nothing there and and if we're gonna stop them the whole time what a collapse you know and I don't know if we got a similar situation going on here with this but you know I just what is behind this I mean what if there's no money at the end of the day who's gonna make up for this can anybody explain that to me good night should I take a shot I think that I'd split it into two buckets in this field where venture capitalist entrepreneurs are developing an idea and asking people for money they publish a white paper they build a following reddit post and these are different communities social network posts medium and so forth and they build a following and then they sell it and raise money and sometimes it's small just like a crowdfunding on Kickstarter but most of them aren't there's been 3,800 of them today over 50% of them fail within four months and and there's different estimates how many are scams and frauds there are good-faith actors in the middle of it too a lot of good faith actors but there's a lot of fraud and scams if if right now if they fail you've only way you could do is try under the securities laws to say they were an unregistered non compliant security and try to under the private rights of action senator securities law try to get something back nothing in the second category its digital gold the digital gold which is Bitcoin and while there's nothing behind it I would say mr. ranking member there's really nothing behind gold either you might all of us we have what's behind it is a cultural norm that for thousands of years we like gold the value of gold the worldwide value of gold is seven trillion dollars by the way just to give you a little sense but only about ten percent of the annual production of gold is used in manufacturing the rest of it is because we think it's kind of nice to have gold necklaces and jewelry or we do it as a store of value so bitcoin is a is a modern form of digital gold and it's a social construct but the money they are there just creating this money out of nowhere I mean the the in the in the first category the the the investor type that would be understated but in the second category you're right which was under this committee I mean you're you're gonna be grappling with this for a while I think I mean in the first category I mean I assume most of people are sophisticated enough to realize they're gonna get fleeced potentially you know I mean it are they or I mean I think there's people get into that area that don't realize what they're getting into they think some are no they're gonna get rich and they're gonna you know get into this deal ahead of everything else and it's going to go up and they're gonna make ten thousand percent on their money and whatever else and some guy is selling them you know on on this I mean I don't know where the protection is here there there's some are very sophisticated like andreessen horowitz and they manage seven billion dollars there there's there many like that but there are others that aren't but you're right I think this Securities and Exchange Commission has a lot of work ahead of them to sort of bring this market into the first part of the market that 70% of the market is commodities but the first part this ICO marketplace is the SCC's they're working at it but they've got a lot of work ahead if I could if I could just add mr. ranking member you know you raise this concept of kind of almost trust right which is who do I trust what's the trusted intermediary the the beauty at least certainly from the perspective of an investor and as a consumer the beauty of these crypto networks is what you're trusting is you're trusting kind of cryptography you're trusting math you're trusting software as opposed to a centralized intermediary and you have a community that's governing the interest there so in other words if the community tries to do something that is inappropriate all of this software is open-source all this software can be basically what's called forked and literally taken over and you know recreated in a new community so there is a norm of community governance that exists in these areas that really substitutes trust from a centralized intermediary to trust to a community that's responsible for government thank you but I'm still skeptical mr. Lucas 5ms Thank You mr. chairman and along with the gentleman from Georgia mr. Scott I have the privilege of setting both on this committee and financial services so I work on this discussion by the panel when it comes to the next regulatory frontier as it impacts the two committees first mr. Cooper how should regulators think about the function of the token when choosing to apply regulatory requirements should regulators look to the functioning of the token at all or only the issuing activity and for example say there's a cryptocurrency we'll call it for the sake of discussion Bitcoin 2.0 and say it functions identically to Bitcoin in every way except that a small portion of the total tokens were pre mined and distributed in token sale is it possible to issue Bitcoin 2.0 through ICO and not have it be a security or is the functioning of the token irrelevant because of the manner in which its issued so I'm asking what my folks back home would define as geek questions but this is where we are yes sir let's say you so yes a couple a couple things so the issuance of those tokens and the sale of